Frictions in repo markets
- In the first chapter I develop a model of repo lending where the main source of asymmetric information between counterparties is the borrower's initial asset holdings. Borrowers finance a risky asset by taking a repo loan from a monopolist lender, who uses the haircut to infer how well capitalized the borrower may be. Losses stem from the costly liquidation of collateral in case of default. Profits come from borrowers' ability to dilute existing creditors by accepting a higher haircut on the loan, inducing a wealth transfer to the monopolist lender. In the symmetric information case, the lender maximizes the wealth transfer until making the loan absolutely risk free. Under asymmetric information there exist conditions where the optimal contract consists in offering the same lending terms to all borrowers (i.e. pooling equilibrium). In the second chapter, I ask what are the consequences of a potential fire sale stemming from repo's exemption from automatic stay? The chapter shows that repo's exemption from stay alters firms' financing and investment decisions ex-ant by enabling them to purchase defaulted collateral at fire sale prices. Fire sales arise endogenously because of limited capital in the market to purchase collateral posted by defaulted firms, i.e. cash-in-the-market pricing. This effectively creates a premium for holding on to dry powder and concentrates asset ownership with firms who have preferences to hold large risky asset positions and risk default. The premium reduces the initial asset price, potentially inducing more firms to take on risky positions, increasing the fraction of defaulting firms in the economy. When repo is subject to automatic stay, secured lenders do not receive their collateral immediately, eliminating the possibility of a fire sale and ex-ante price distortion.
|Type of resource
|electronic; electronic resource; remote
|1 online resource.
|Stanford University, Graduate School of Business.
|Nagel, Stefan, 1973-
|Nagel, Stefan, 1973-
|Statement of responsibility
|Submitted to the Graduate School of Business.
|Thesis (Ph.D.)--Stanford University, 2013.
- © 2013 by Sebastian Jose Infante Bilbao
- This work is licensed under a Creative Commons Attribution Non Commercial 3.0 Unported license (CC BY-NC).
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