Securities market theory: Possession, repo and rehypothecation

Bottazzi, Jean Marc; Luque, Jaime; Páscoa, Mário Rui

doi:10.1016/j.jet.2010.11.004

Cited by 58 publications

(44 citation statements)

References 25 publications

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“…Market clearing would not be possible. The same argument applies to all other specifications of the asset payoffs 4 . In this example it is therefore not possible to achieve the Arrow-Debreu equilibrium outcome if all promises are only backed by the tree.…”

Section: Equivalence Of Arrow-debreu and Financial Market Equilibriummentioning

confidence: 91%

“…Geanakoplos and Zame (2002) refer to this assumption as "pyramiding". In practice, financial securities are routinely used for collateralized borrowing (e.g., in repo agreements, see Bottazzi et al (2012), but also in other transactions) -however, as Brunnermeier and Pedersen (2009) point out, in order to take short positions in more complicated securities such as derivatives brokers typically require cash-collateral.…”

Section: Financial Markets With Collateral Constraintsmentioning

confidence: 99%

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Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Gottardi

Kübler

2015

Review of Economic Studies

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In this article we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset pay-offs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints. We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. Abstract In this paper we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset payoffs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints.We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off.We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. * We thank seminar participants at various universities and conferences and in particular Arpad Abraham,

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Section: Equivalence Of Arrow-debreu and Financial Market Equilibriummentioning

confidence: 91%

Section: Financial Markets With Collateral Constraintsmentioning

confidence: 99%

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Gottardi

Kübler

2015

Review of Economic Studies

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“…In particular, Bottazzi et al (2012) show how asset and repo markets coexist in a stylized general equilibrium framework. In that paper the authors underscore a particularly relevant restriction that securities dealers must satisfy: the box constraint.…”

Section: Literature Reviewmentioning

confidence: 99%

Bond Market Intermediation and the Role of Repo

Huh¹,

Infante²

2017

FEDS

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This paper models the important role that repurchase agreements (repos) play in bond market intermediation. Not only do repos allow dealers to finance their activities, but they also increase dealers' ability to satisfy levered client demands without having to adjust their holdings of risky assets. In effect, the ability to borrow specific assets for delivery allows dealers to source large quantity of assets without taking ownership of them. Larger levered client orders imply larger asset borrowing demands, thus increasing the borrowing cost for the asset (i.e., repo specialness). Dealers pass on the higher intermediation cost to their clients in the form of higher bid-ask spreads. Although this method of intermediation is optimal, the use of repos significantly increases dealers' balance sheets. Limiting one dealer's balance sheet leverage, leaving all else equal, reduces the affected dealer's market making abilities and increases his bid-ask spreads. The equilibrium effect of limiting all dealers' balance sheet leverage on bidask spreads is unclear, and depends on the intensity of clients' demand and securities lenders' sensitivity to repo specialness.

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“…The term "box" comes from market parlance, originally explicitly recognizing the necessity of keeping security titles in a box. The "box" constraint is used by Bottazzi et al (2012) to model repo markets. In that paper, a trader can sell a security if he owns it (as security endowment) or if he borrows the security through a repurchase agreement (or repo).…”

Section: Sxs As Trading Clubs: Modelmentioning

confidence: 99%

“…In that paper, a trader can sell a security if he owns it (as security endowment) or if he borrows the security through a repurchase agreement (or repo). Here, we do not allow for repo markets, so the "box" constraint in our context is significantly stronger than in Bottazzi et al (2012) as it prevents a trader from selling more of a security than his security endowment. Still, this terminology is important in our work because it keeps track of the total of security titles (security endowments) that a trader brings to a SX.…”

Section: Sxs As Trading Clubs: Modelmentioning

confidence: 99%

Endogenous formation of security exchanges

Faias

Luque

2016

Econ Theory

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We use club theory for the first time to provide a model of securities exchange (SX) formation. We think of a SX as a local public good that allows its traders to diversify risk by trading their securities with other SX members. In our two-stage equilibrium setting, traders evaluate SXs depending on their risk-sharing possibilities and, given these evaluations, choose the SX they want to join. Security prices can differ among SXs and traders may value SX memberships differently. We establish continuity properties in both stages and show that equilibrium exists for a generic set of economies. JEL ClassificationWe thank comments and suggestions from

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Securities market theory: Possession, repo and rehypothecation

Cited by 58 publications

References 25 publications

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Bond Market Intermediation and the Role of Repo

Endogenous formation of security exchanges

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