DP13547 Repo rates and the collateral spread: Evidence

Author(s): Kjell G Nyborg, Cornelia Roesler
Publication Date: February 2019
Keyword(s): collateral spread, Eurex Repo, general collateral, liquidity, repo rate, unsecured rate
JEL(s): G01, G12, G21
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13547

The spread between unsecured and repo rates (collateral spread) fluctuates substantially and is negative on a significant portion of days. Recent theoretical work argues that collateral spreads are determined by a constrained-arbitrage relation between the unsecured rate, the repo rates, and the expected rate of return of the underlying security. Negative collateral spreads arise in equilibrium if unsecured markets are sufficiently tight, unsecured rates spike down, or security markets are sufficiently depressed in terms of prices, liquidity, and volatility. The objective of this paper is to examine the determinants of collateral spreads by testing the constrained-arbitrage theory. The findings are supportive.