Working Paper: CEPR ID: DP13547
Authors: Kjell G. Nyborg; Cornelia Roesler
Abstract: The spread between unsecured and repo rates (collateral spread) fluctuates substantially and is negative on a significant portion of days. Recent theoretical work argues that collateral spreads are determined by a constrained-arbitrage relation between the unsecured rate, the repo rates, and the expected rate of return of the underlying security. Negative collateral spreads arise in equilibrium if unsecured markets are sufficiently tight, unsecured rates spike down, or security markets are sufficiently depressed in terms of prices, liquidity, and volatility. The objective of this paper is to examine the determinants of collateral spreads by testing the constrained-arbitrage theory. The findings are supportive.
Keywords: collateral spread; liquidity; unsecured rate; repo rate; general collateral; eurex repo
JEL Codes: G01; G12; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unsecured rates (E43) | collateral spread (F65) |
| repo rates (E43) | collateral spread (F65) |
| expected return on underlying security (G12) | collateral spread (F65) |
| tight unsecured markets (G10) | negative collateral spreads (G19) |
| security markets being depressed (G10) | negative collateral spreads (G19) |
| increase in haircuts (E39) | collateral spread (F65) |
| higher volatility (G17) | lower collateral spreads (G19) |
| collateral spread spikes (F65) | unsecured rates spike (E43) |