Citation

Discussion Paper Details

Please find the details for DP13546 in an easy to copy and paste format below:

Full Details

Title: Repo rates and the collateral spread puzzle

Author(s): Kjell G Nyborg

Publication Date: February 2019

Keyword(s): collateral spread, constrained-arbitrage, general collateral, liquidity, market linkages, repo rate and unsecured rate

Programme Area(s): Financial Economics

Abstract: Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured borrowing constraints in the market for liquidity. Repos and security cash-market trades are alternative means to get liquidity. Collateral spreads (unsecured less repo rate) can turn negative if borrowing constraints tighten, unsecured rates spike down, or from a depressed and illiquid security market. The constrained-arbitrage theory sheds light on the evolution of collateral spreads over time.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13546

Bibliographic Reference

Nyborg, K. 2019. 'Repo rates and the collateral spread puzzle'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13546