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

Research output: Contribution to journalArticle

2 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)145-164
Number of pages20
JournalJournal of Money, Credit and Banking
Volume48
Issue number1
DOIs
Publication statusPublished - 2016 Feb 1
Externally publishedYes

Keywords

  • Haircut
  • Over-the-counter market
  • Repo
  • Securities broker-dealer; short-term investor

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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