Collateral Demand in Wholesale Funding Markets

Résumé

Repo markets are systemically important funding markets, but are also used by firms to obtain the assets provided as collateral. Do these two functions complement each other? We build and estimate a model of repo trade between heterogeneous firms, and f ind that the answer is no: volumes and gains to trade would both be higher absent collateral demand. This is because on average the firms that need funding are also those that value the collateral to speculate or hedge interest rate risk. These results have implications for policies that affect collateral demand in repo markets, including rules on short selling.

Mots-clés

Repo, collateral demand, intermediation, financial crises.;

Codes JEL

G01: Financial Crises
G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages
G23: Non-bank Financial Institutions • Financial Instruments • Institutional Investors
G11: Portfolio Choice • Investment Decisions
L14: Transactional Relationships • Contracts and Reputation • Networks