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Clogged pipes in the repo market

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  • Ahn, Jungkyu
  • Ahn, Yongkil

Abstract

A repurchase agreement (repo) transaction has a dual nature: collateralized loans and, conversely, loaned collateral. Cash and collateral flows through the repo market are occasionally clogged with runs or squeezes. We find that the tension between cash funding (incurring upward surges) and collateral sourcing (incurring downward spikes) is associated with excess deviations in repo rates. The need for collateral sourcing intermittently surges, whereas the effect of secured cash funding is relatively stable. Our results suggest that the strategic interactions between cash lenders and collateral providers in the repo market may aggravate the robustness of transaction-based repo rates.

Suggested Citation

  • Ahn, Jungkyu & Ahn, Yongkil, 2023. "Clogged pipes in the repo market," Finance Research Letters, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:finlet:v:57:y:2023:i:c:s1544612323006566
    DOI: 10.1016/j.frl.2023.104284
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    References listed on IDEAS

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    Cited by:

    1. Ahn, Yongkil, 2024. "Flight to safety, intermediation frictions, and US Treasury floating rate note prices," Finance Research Letters, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Repurchase agreement; Financial plumbing; Cash funding; Collateral sourcing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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