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Market Power in Wholesale Funding: A Structural Perspective from the Triparty Repo Market

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82
Author
Amy Huber
Category
Financial
Date Posted
2022/05/19
Date Retrieved
2022/09/25
Date Revised
2022/09/25
Date Written
2022/09/23
Description
I model and structurally estimate the equilibrium rates and volume on the Triparty repo market to study imperfect competition in wholesale funding. Even in this systemically important market where seemingly homogeneous repos trade I document persistent rate differences paid by dealers. I characterize the Triparty market as cash-lenders allocating their portfolios among differentiated dealers who set repo rates. I find that cash-lenders aversion to portfolio concentration and preference for stable lending grant dealers substantial market power: between 2011 and 2017 dealers borrowed at rates that were 21 bps lower than their marginal value of intermediating borrowed funds. Dealers market power makes the observed wholesale repo rate understate the financing rate available to market participants who rely on repo funding and offers a novel explanation for funding spreads such as the Treasury cash-futures basis and the Treasury swap spread.
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JEL Classifications
G11 G12 G21 G23 L13
Keywords
Triparty repo market power portfolio allocation funding spreads intermediary asset pricing
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Pages
71
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URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4228333
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