The repo market has been viewed as a potential source of financial instability since the 2007-09 financial crisis, owing in part to findings that margins increased sharply in a segment of this market. This paper provides evidence suggesting that no system-wide run on repo occurred. Using confidential data on tri-party repo, a major segment of this market, we show that the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis. However, we also document a sharp decline in the tri-party repo funding of Lehman in September 2008.
The repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis, based in part on findings that margins increased sharply in a segment of this market. This paper provides evidence suggesting that there was no system-wide run on repo. Using confidential data on tri-party repo, a major segment of this market, we show that, the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis. However, we also document a sharp decline in the tri-party repo funding of Lehman in September 2008. of the Task Force on Tri-Party Repo Infrastructure for helpful comments on an earlier draft. We would also like to thank an anonymous referee and Associate Editor for their helpful suggestions. All remaining errors are our own.The Journal of Finance R percentage, is called the "margin" and measures the extent to which the cash loan is overcollateralized. 1 The repo market is an important financial market because it is a key source of short-term funding for securities dealers and some of their clients. 2 This market is also critical for secondary market liquidity in Treasuries and other securities, and plays an important role in the pricing and price discovery of cash and derivatives instruments.The U.S. repo market comprises several segments. As we describe in detail in Section I, it is useful to distinguish the bilateral market, where the settlement of the repo is handled by the trading parties, from the tri-party repo market, where a third party provides settlement and collateral management services. These two segments behaved very differently during the crisis.Gorton and Metrick (2012) study data from a high-quality dealer trading with other high-quality dealers in the bilateral repo market. They show that margins increased dramatically, similar to the "margin spirals" modeled in Brunnermeier and Pederson (2009) (see also Adrian and Shin (2010)). Looking at data from another segment of the bilateral market, in which dealers lend to their clients (notably hedge funds), we find similar increases in margins.Hence, it appears that the bilateral repo market suffered from a tightening of financing conditions. In the tri-party repo market, however, margins for all but the lowest quality collateral changed very little, as shown in Figure 1.We discuss this figure in more detail later in the paper, but note here that margins for repos collateralized by U.S. Treasuries and agency debentures did not change throughout the crisis. Furthermore, margins for repos backed by the lowest quality collateral used in the tri-party repo market, labeled "nongovernment," increased by only two percentage points, from 5% to 7%. This increase is much less pronounced than in the bilateral market we study. Figure 2 shows the differences in the average margin for overnight repos between the segment of the bilateral market for which we have data and the tri-party repo market. These spreads are sizable for corporate bonds (over 10 percentage points in 2009) and en...
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper provides a descriptive and quantitative account of the tri-party repo market before the reforms proposed in 2010 by the Task Force on Tri-Party Repo Infrastructure (Task Force 2010). We provide an extensive description of the mechanics of this market. We also use data from July 2008 to early 2010 to document quantitative features of he market. We find that both the level of haircuts and the amount of funding were surprisingly stable in this market. The stability of the margins is in contrast to evidence from other repo markets. Perhaps surprisingly, the data reveal relatively few signs of stress in the market for dealers other than Lehman Brothers, on which we provide some evidence. This suggests that runs in the tri-party repo market may occur precipitously, like traditional bank runs, rather than manifest themselves as large increases in margins.
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in www.econstor.euThis paper presents preliminary fi ndings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. AbstractTo conduct academic research on the federal funds (fed funds) market, historically one of the most important fi nancial markets in the U.S., some empirical economists have used market level measures published by the Markets Group at the Federal Reserve Bank of New York (FRBNY). To obtain more disaggregate data, some researchers have relied on a separate source of information: individual transactions inferred indirectly from an algorithm based on the work of Furfi ne (1999). To date, however, the accuracy of this algorithm has not been formally established. In this paper, we conduct a test aimed at assessing the ability of the algorithm to identify correctly individual overnight fed funds transactions conducted by two banks, which are among the most active in the fed funds market. The results are discouraging. We estimate the average type I and type II errors from 2007 to 2011 to be 81% and 23%, respectively. Furthermore, we argue that these errors i) apply to almost half of the algorithm's output, ii) introduce systematic biases, and iii) may not subside when the algorithm's output is aggregated. Our results therefore raise serious concerns about the appropriateness of using the algorithm's output to study the fed funds market. Because the FRBNY Markets Group relies on a different source of data than the algorithm output, our results have no bearing on their understanding of the fed funds market and their calculation of market level measures, including the effective fed funds rate.
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe provide an overview of the data requirements necessary to monitor repurchase agreements (repos) and securities lending markets for the purposes of informing policymakers and researchers about fi rm-level and systemic risk. We start by explaining the functioning of these markets, then argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection should include six characteristics of repo and securities lending trades at the fi rm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty.
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper is intended to serve as a reference guide on U.S. repo and securities lending markets. It begins by presenting the institutional structure, and then describes the market landscape, the role of the participants, and other characteristics, including how repo and securities lending activity has changed since the 2007-09 financial crisis. The paper then discusses vulnerabilities in the repo and short-term wholesale funding markets and the efforts to limit potential systemic risks. It next provides an overview of existing data sources on securities financing markets and highlights specific shortcomings related to data standards and data quality. Lastly, the authors discuss a near-term agenda to help fill some of the data gaps in repo and securities lending markets.
This paper studies the within-model-year pricing, production, and inventory management of new automobiles. Using new monthly data on U.S. transaction prices, we document that, for the typical vehicle, prices fall over the model year at a 9.0 percent annual rate. Concurrently, both sales and inventories are hump shaped. To explain these time series, we formulate an industry model for new automobiles in which inventory and pricing decisions are made simultaneously. The model predicts that automakers' build-to-stock inventory management policy substantially influences the time-series of prices and sales, accounting for four-tenths of the price decline observed over the model year.Keywords: dynamic pricing, revenue management, discrete-choice demand estimation, build-to-stock inventory policy JEL classification: D21, D42, E22, L11, L62 * We thank Ana Aizcorbe, Steve Berry, Andrew Cohen, Gautam Gowrisankaran, Amil Petrin, John Rust, John Stevens, and participants at numerous conferences and seminars for their helpful comments. We also received valuable comments from the editor and two referees. Finally we thank Bob Schnorbuss for helping us obtain and interpret the data from J.D. Power and Associates. George Hall gratefully acknowledges financial support from the Alfred P. Sloan Foundation. The views expressed in the paper are those of the authors and not necessarily reflective of views at the Board of Governors, the Federal Two common features of durable goods markets are high levels of inventories relative to sales and declining prices over the product cycle. In this paper, we jointly consider the optimal pricing and inventory management policies for automakers, the quintessential durable goods producer. Inventories play two major roles in our model. On the firm's side, inventories help manufacturer's smooth non-convex costs of production. On the consumer's side, higher levels of inventories provide more variety, thus making it easier to match consumers with their ideal vehicle. We find a tight link between inventories and prices both through inventory's production-smoothing and variety-increasing roles. Indeed, our model predicts that automakers' build-to-stock inventory management policy is responsible for four-tenths of the 9.0 percent decline (annual rate) in prices over the model year.To explain the covariation of prices, sales, and inventories for new automobiles over the model year,we formulate an industry model. On the consumer side, we estimate preferences for automobiles by employing the econometric methodology developed in the discrete-choice literature (for example, Berry, Levinsohn, and Pakes, 1995;Goldberg, 1995;and Petrin, 2002; to name a few). Our approach differs from the standard one in three ways: First, motivated by Kahn (1987Kahn ( , 1992 who finds that inventories are productive in generating greater sales at a given price, we include an inventory-based measure of variety in the consumer's indirect utility function. Second, we estimate our demand-side model at a quarterly, rather than ...
We use unique data from U.S. bank holding company-affiliated securities dealers to study the use of collateral in bilateral repurchase and securities lending agreements. Market participants' use of collateral differs substantially across asset classes: for U.S. Treasury securities transactions, we find that haircuts are large enough to provide full protection from default, whereas the same is not usually true for equities transactions. Further, although most of the equities in our sample are each associated with a unique haircut, most of the U.S. Treasury securities are each associated with more than one haircut. We relate these findings to implications of the zero value-at-risk feature that can be found in theories of collateral as an enforcement mechanism, and show that the data do not confirm these implications. We then turn to models of adverse selection that predict a negative relationship between haircuts and interest rates, based on the use of collateral as a screening mechanism. We find this negative relationship only for those trades in which the securities dealers are receiving U.S. Treasury securities and delivering cash.
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