Explaining repo specialness

Abstract

We study the dynamics of specialness for 1‐day repo contracts on Italian government bonds over a 10‐year sample period. As predicted by Duffie's (1996) model, our results show that collateral supply is a significant factor for specialness. However, we enrich that finding by also showing a clear impact from repo liquidity, collateral riskiness, information uncertainty, and short‐selling proxies, revealing the importance of speculative bond demand for specialness. During crisis periods, bond fire sales and European Central Bank interventions also have a large impact on repo specialness. We identify recurrent patterns for specialness around bond auctions. Specialness increases steadily from the auction announcement date until a few days before the auction settlement date, which is consistent with overbidding behaviour and a short selling of treasuries (via reverse repos) from primary dealers ahead of auctions.

Determinants of intraday dynamics and collateral selection in centrally cleared and bilateral repos

“…24 Finally, for every additional 1 bp of specialness, the probability decreases by 0.16%. To understand the economic significance of this latter variable, we need to bear in mind that the bond specialness reached a peak of more than 100 bps for 10-year BTPs during the ESDC (see Dufour, Marra, Sangiorgi, and Skinner, 2019).…”

“…In our study, we examine the relationship between the ON GC intraday repo spread and the intraday liquidity, modified duration and supply of the collateral bonds. These bond variables are constructed using tick-by-tick intraday data from MTS and implementing the same sequence of steps as in Dufour et al (2019):…”