A new version of our repo paper on “The Euro Interbank Repo Market” is available.
The search for a market design that ensures stable bank funding is at the top of regulators’ policy agenda. This paper empirically shows that an important part of the European money market features this quality, namely the central counterparty (CCP)-based euro interbank repo market. Using a unique and comprehensive data set, we provide the first systematic study of this market and show that it functions well, even during crisis episodes. CCP-based repos secured with high-quality collateral even act as a shock absorber, in the sense that repo lending increases with risk, while spreads, maturities, and haircuts remain stable.
You can download the full paper on SSRN.
Due to popular demand, I uploaded the data for the market-wide FX liquidity index that we construct and use in our paper titled “Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums”. Feel free to use it for your academic work. You can download the data as xls and csv files from the Data page.
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, exclusive reliance on safe collateral, and reusability of collateral, appear to be key characteristics that render the market resilient.
The paper is available on SSRN.
FT Alphaville published an article titled “Carrying liquidity as far as you can” including a discussion of our paper on foreign exchange liquidity.