Duffie (1996) examines the theoretical impact of repo “specials” on the prices of Treasury securities and concludes that, all else the same, an issue on special will carry a higher price than an otherwise identical issue. We examine this hypothesis and find strong evidence in support of it. We also examine whether the liquidity premium associated with “on‐the‐run” issues is due to repo specialness and find evidence of a distinct effect. Finally, we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables àre generally significant.

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Duffie (1996) examines the theoretical impact of repo "specials" on the prices of Treasury securities and concludes that, all else the same, an issue on special will carry a higher price than an otherwise identical issue. We examine this hypothesis and find strong evidence in support of it. We also examine whether the liquidity premium associated with "on-the-run" issues is due to repo specialness and find evidence of a distinct effect. Finally, we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables are generally significant. UNDERLYING THE CASH MARKET for U.S. Treasury securities is the financing or "repo" market. At any given time, the repo rate for most Treasury issues (the general collateral rate) is the same, but a few issues are typically "on special." An issue on special has associated with it a repo rate that is less than the prevailing general collateral rate. As a result, the owner of a security that is on special is able to obtain below-market financing rates via a repurchase agreement.Duffie (1996) examines the theoretical causes of repo specials and their impact on the prices of Treasury securities in the context of a general equilibrium model. His primary conclusion is that specialness will be priced in the cash market, meaning that, all else the same, an issue on special (or likely to go on special) will carry a higher price than an otherwise identical issue. We investigate this hypothesis using data on repo specials and find clear evidence in support of it. We conclude that specialness is priced and that the magnitude of the cash market premium reflects both the future duration and magnitude of repo specialness.We also examine whether the liquidity premium associated with "on-therun" issues is due to repo specialness and find evidence of a distinct effect. Finally, as a test of Duffie's model, we investigate whether auction tightness and percentage awarded to nonbank primary dealers are related to subsequent specialness. The evidence is consistent with predictions, with both variables generally significant. * University of Kentucky, Lexington, Kentucky. We thank Barney Hauptfuhrer and Peter Horowitz of Three Crown Capital Partners and Ken Schacter of Richards and O'Neil for sparking our interest in this subject and for providing some of the data used in this study. We have benefited from comments by and discussions with The Journal of Finance The remainder of this article is organized as follows. In the next section, we provide a brief background discussion on the repo market and the effect of repo specials. Section II describes the data, presents summary statistics, and examines two particularly notable instances of repo specials. Section III contains empirical methods and results regarding the effect of repo specials. Section IV examines auction tightness, distribution of ownership, and repo specials. Section V summarizes the main results of the article. I. BackgroundThe Treasury repo market serves many parti...

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