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Special Repo Rates and the Cross-Section of Bond Prices: The Role of the Special Collateral Risk Premium
[Pr icing the term structure with linear regressions]

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  • Stefania D’Amico
  • N Aaron Pancost

Abstract

We price the risky component of specialness spreads—identified by their deviations from the expected auction cycle—within a dynamic term structure model estimated using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a time-varying SC risk premium that we quantitatively link to various price anomalies, such as the on-the-run premium. The SC risk premium explains about 80% of the on-the-run premium and a substantial share of other Treasury price anomalies, suggesting that unexpected fluctuations in the specialness spreads of recently issued nominal Treasury securities are a common risk factor.

Suggested Citation

  • Stefania D’Amico & N Aaron Pancost, 2022. "Special Repo Rates and the Cross-Section of Bond Prices: The Role of the Special Collateral Risk Premium [Pr icing the term structure with linear regressions]," Review of Finance, European Finance Association, vol. 26(1), pages 117-162.
    • Handle: RePEc:oup:revfin:v:26:y:2022:i:1:p:117-162.
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    3. Jappelli, Ruggero & Pelizzon, Loriana & Subrahmanyam, Marti G., 2023. "Quantitative easing, the repo market, and the term structure of interest rates," SAFE Working Paper Series 395, Leibniz Institute for Financial Research SAFE.

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    More about this item

    Keywords

    Special repo rates; Term structure of interest rates; Dynamic no-arbitrage models; JEL codes: G12; G23; C33;
    All these keywords.

    JEL classification:

    • 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
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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