Header

UZH-Logo

Maintenance Infos

Repo Rates and the Collateral Spread Puzzle


Nyborg, Kjell G (2019). Repo Rates and the Collateral Spread Puzzle. Swiss Finance Institute Research Paper 19-04, University of Zurich.

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.

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.

Statistics

Citations

Dimensions.ai Metrics

Altmetrics

Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:22 February 2019
Deposited On:28 Aug 2023 13:02
Last Modified:06 Mar 2024 14:31
Series Name:Swiss Finance Institute Research Paper
Number of Pages:58
OA Status:Closed
Publisher DOI:https://doi.org/10.2139/ssrn.3335203
Related URLs: (Organisation)
Other Identification Number:merlin-id:19144
Full text not available from this repository.