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Collateral reuse as a direct funding mechanism in repo markets

Author

Listed:
  • Issa, George
  • Jarnecic, Elvis

Abstract

We perform the first transaction-level empirical study on collateral reuse as a direct funding mechanism for dealers. We show that dealers surprisingly set a negative spread between the haircuts of the initial versus reuse repos, rejecting the conjecture that dealers derive an immediate cash injection. In the primary analysis, however, our findings are broadly consistent with theoretical models: haircut spreads are negatively related to interest rate spreads and positively related to interbank funding costs; as default risk increased during the 2007–09 Crisis, haircut spreads decreased for higher-affected foreign dealers.

Suggested Citation

  • Issa, George & Jarnecic, Elvis, 2024. "Collateral reuse as a direct funding mechanism in repo markets," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:pacfin:v:86:y:2024:i:c:s0927538x24002002
    DOI: 10.1016/j.pacfin.2024.102449
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    More about this item

    Keywords

    Collateral; Rehypothecation; Repo markets; Debt markets; Banking;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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