Working paper

Collateral Demand in Wholesale Funding Markets

Jamie Coen, Patrick Coen, and Anne-Caroline Hüser

Abstract

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.

Keywords

Repo, collateral demand, intermediation, financial crises.;

JEL codes

  • 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

Reference

Jamie Coen, Patrick Coen, and Anne-Caroline Hüser, “Collateral Demand in Wholesale Funding Markets”, TSE Working Paper, May 2024.

See also

Published in

TSE Working Paper, May 2024