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

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  • Hajime Tomura

    (Graduate School of Economics, University of Tokyo)

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.

Suggested Citation

  • Hajime Tomura, 2014. "Investment Horizon and Repo in the Over-the-Counter Market," UTokyo Price Project Working Paper Series 037, University of Tokyo, Graduate School of Economics.
    • Handle: RePEc:upd:utppwp:037
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    5. Madison, Florian, 2024. "Asymmetric information in frictional markets for liquidity: Collateralized credit vs asset sale," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).

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    More about this item

    Keywords

    Repo; Over-the-counter market; Securities broker-dealer; Short-term investor; Haircut.;
    All these keywords.

    JEL classification:

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

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