Finance and Economics Discussion Series (FEDS)
February 2025
Rewiring repo
Jin-Wook Chang, Elizabeth Klee, and Vladimir Yankov
Abstract:
We develop a model of the repo market with strategic interactions among dealers who compete for funding in a decentralized over-the-counter market and have access to a centrally cleared interdealer market. We show that such “wiring” of the repo market combined with imperfect competition in dealer funding results in market inefficiencies and instability. The model allows us to disentangle supply and demand factors, and we use these factors to estimate supply and demand elasticities. Our estimates suggest that the instability of the market in September 2019 was driven by a large supply shock facing inelastic dealer funding demand, amplified by strategic interactions among dealers. We evaluate different interventions for market functioning and efficiency, including the Standing Repo Facility.
Keywords: market efficiency, over-the-counter markets, Standing Repo Facility, centrally cleared markets, networked markets, repo market
DOI: https://doi.org/10.17016/FEDS.2025.013
PDF: Full Paper
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