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A Theory of Repurchase Agreements, Collateral Re-use, and Repo Intermediation

Gottardi, Piero and Maurin, Vincent and Monnet, Cyril (2019) 'A Theory of Repurchase Agreements, Collateral Re-use, and Repo Intermediation.' Review of Economic Dynamics. ISSN 1094-2025

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Abstract

We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a “collateral multiplier” effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Elements
Date Deposited: 10 May 2019 09:58
Last Modified: 17 Sep 2019 17:15
URI: http://repository.essex.ac.uk/id/eprint/24562

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