SMU SOE Seminar Series (May 21, 2024): Haircut, Interest Rate and Collateral Quality in the Repo Market: Evidence and Theory

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ABSTRACT Leveraging the universe of transaction-level data from the Korean tri-party repo market, we examine the determinants of a haircut in a repo contract with particular attention to the joint determination with an interest rate. First, both the haircut and the interest rate increase with the riskiness of collateral, generating a seemingly positive relationship between the two. Second, exploiting the unique nature of our data, we reveal that the haircut and the interest rate are negatively related once fully controlling for collateral risk, thereby reconciling the mixed findings in the literature. Third, the slope of the negative relationship decreases in market risk, suggesting that the relative importance of the haircut in the negotiation of repo terms increases when a concern for default risk is larger. We develop a theory of collateralized debt featuring collateral risk, incentives to acquire information about collateral, and opportunistic default, which can jointly account for the main findings. Click here to view the CV.
		PRESENTER Sangyup Choi Yonsei University
		RESEARCH FIELDS International Finance Financial Markets Macroeconomics Banking
		DATE: 21 May 2024 (Tuesday)
		TIME: 4pm - 5.30pm
		VENUE: Meeting Room 5.1, Level 5 School of Economics Singapore Management University 90 Stamford Road Singapore 178903