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Investment Horizon and Repo in the Over‐the‐Counter Market

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  • HAJIME TOMURA

Abstract

This paper presents a three‐period model featuring a short‐term investor in the over‐the‐counter bond market. A short‐term investor stores cash because of a need to pay cash at some future date. If a short‐term investor buys bonds, then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market. Ex‐ante, this hold‐up problem explains the use of a repo by a short‐term investor, the existence of a haircut, and the vulnerability of a repo market to counterparty risk. This result holds without any uncertainty about bond returns or asymmetric information.

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  • Hajime Tomura, 2016. "Investment Horizon and Repo in the Over‐the‐Counter Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 145-164, February.
    • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:1:p:145-164
    DOI: 10.1111/jmcb.12293
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    2. Abe, Naohito & Moriguchi, Chiaki & Inakura, Noriko, 2014. "The Impact of the Great East Japan Earthquake on Commodity Prices: New Evidence from High-Frequency Scanner Data," Research Center for Price Dynamics Working Paper Series 12, Research Center for Price Dynamics, Institute of Economic Research, Hitotsubashi University.
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    5. Fukai, Hiroki, 2021. "Optimal interventions on strategic fails in repo markets," MPRA Paper 106090, University Library of Munich, Germany.

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    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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