Rehypothecation and liquidity

Andolfatto, David; Martin, Fernando M.; Zhang, Shengxing

doi:10.1016/j.euroecorev.2017.09.010

Cited by 18 publications

(14 citation statements)

References 24 publications

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“…Our work contributes to the recent theoretical literature on the consequences of collateral rehypothecation (see e.g. Bottazzi et al, 2012;Andolfatto et al, 2017;Gottardi et al, 2017;Singh, 2016). This literature has highlighted the role of rehypothecation in determining repo rates (e.g.…”

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confidence: 62%

Collateral Unchained: Rehypothecation Networks, Concentration and Systemic Effects

et al. 2018

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We study how network structure affects the dynamics of collateral in presence of rehypothecation. We build a simple model wherein banks interact via chains of repo contracts and use their proprietary collateral or re-use the collateral obtained by other banks via reverse repos. In this framework, we show that total collateral volume and its velocity are affected by characteristics of the network like the length of rehypothecation chains, the presence or not of chains having a cyclic structure, the direction of collateral flows, the density of the network. In addition, we show that structures where collateral flows are concentrated among few nodes (like in core-periphery networks) allow large increases in collateral volumes already with small network density. Furthermore, we introduce in the model collateral hoarding rates determined according to a Value-at-Risk (VaR) criterion, and we then study the emergence of collateral hoarding cascades in different networks. Our results highlight that network structures with highly concentrated collateral flows are also more exposed to large collateral hoarding cascades following local shocks. These networks are therefore characterized by a trade-off between liquidity and systemic risk. This paper investigates the collateral dynamics when banks are connected in a network of financial contracts and they have the ability to rehypothecate the collateral along chains of contracts.

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confidence: 62%

Collateral Unchained: Rehypothecation Networks, Concentration and Systemic Effects

et al. 2018

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“…Our paper is in the field of the "New Monetarist Economics," a branch of literature that builds on Kiyotaki and Wright (1989) and especially Lagos and Wright (2005). 3 In our model, agent- 1 It is socially beneficial that government bonds cannot be used as a medium of exchange. Otherwise, bonds would be perfect substitutes for money and thus be redundant.…”

Section: Literaturementioning

confidence: 99%

“…2 See Greenwald and Stiglitz (1986) and Berentsen et al (2016) for a more detailed discussion. 3 A detailed overview of major contributions to this field can be found in Williamson and Wright (2010), Nosal and Rocheteau (2011), and .…”

Section: Literaturementioning

confidence: 99%

On the optimal quantity of liquid bonds

Huber

Kim

2017

Journal of Economic Dynamics and Control

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We develop a dynamic general equilibrium model to analyze the optimal quantity of liquid bonds by investigating the following three questions: Under what conditions is it socially desirable to contract the bond supply, what incentive problems are mitigated by doing this, and how large are the effects? We show that reducing the bond supply induces agents to increase their demand for money, which can enhance welfare by improving the allocation of the medium of exchange. However, this effect fails for high inflation rates, because agents hold so little money in the first place that manipulating the bond supply is not enough to correct the misallocation.

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“…As with cash, this security may conceivably circulate in a collateral chain before it is ultimately returned. 3…”

Section: Accepted Manuscriptmentioning

confidence: 99%

“…Again, we are not asking why a hedge fund in need of cash does not simply sell its security and reverse the transaction at a later date if so desired 3. We do not consider extended collateral chains in the formal model below, though such an extension can be easily incorporated without changing the flavor of our reported…”

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confidence: 99%

Rehypothecation and Liquidity

2015

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We develop a dynamic general equilibrium monetary model where a shortage of collateral and incomplete markets motivate the formation of credit relationships and the rehypothecation of assets. Rehypothecation improves resource allocation because it permits liquidity to flow where it is most needed. The liquidity benefits associated with rehypothecation are shown to be more important in high-inflation (high interest rate) regimes. Regulations restricting the practice are shown to have very different consequences depending on how they are designed. Assigning collateral to segregated accounts, as prescribed in the Dodd-Frank Act, is generally welfare-reducing. In contrast, an SEC15c3-3 type regulation can improve welfare through the regulatory premium it confers on cash holdings, which are inefficiently low when interest rates and inflation are high.

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Rehypothecation and liquidity

Cited by 18 publications

References 24 publications

Collateral Unchained: Rehypothecation Networks, Concentration and Systemic Effects

Collateral Unchained: Rehypothecation Networks, Concentration and Systemic Effects

On the optimal quantity of liquid bonds

Rehypothecation and Liquidity

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