New paper “Fragility of Money Markets”

I have a new paper on "Fragility of Money Markets" (with Angelo Ranaldo and Matthias Rupprecht). We provide the first comprehensive theoretical model for money markets encompassing unsecured and secured funding, asset markets, and central bank policy. Capital-constrained, leveraged banks invest in assets and raise short-term funds by borrowing in the unsecured and secured money markets. Our model derives how funding liquidity across money markets is related, explains how a shock to asset values can lead to mutually reinforcing liquidity spirals in both money markets, and shows how borrowers' flight-to-safety and risk-seeking behavior impacts their liability structure. We derive the socially optimal leverage and funding structure and show which combination of conventional and unconventional monetary policies and regulatory measures can reduce money market fragility. The paper is available on SSRN. ...
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New paper: “The Euro Interbank Repo Market”

We finalized a first complete draft for a new paper titled "The Euro Interbank Repo Market". The repo market is an important part of the shadow banking system. Using a novel and comprehensive dataset from an electronic trading platform, we provide the first systematic study of the euro interbank repo market. We document the evolution of repo market activity and identify risk and central bank liquidity provisions as the main state variables. In contrast to repo markets in the United States, we find that the bilateral central counterparty-based segment was resilient during 2006-13, which includes severe crisis periods. An increase in risk significantly increases repo trading volume, but has virtually no effect on repo rates, average maturity, and haircuts. Moreover, volume in the unsecured market is negatively related to repo volume. This suggests that, under certain conditions, banks use the repo market as a means of liquidity hoarding. The euro repo market infrastructure, including anonymous trading via a central counterparty,...
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