Why Rent When You Can Buy? A Theory of Repurchase Agreements

Cyril Monnet (University of Bern) 

Riccardo Faini CEIS Seminar

Riccardo Faini CEIS Seminars
When

Friday, November 25, 2011 h. 12:00-13:30

Where
Aula B - Primo piano
Description

In a model with matching frictions, we provide conditions under which repurchase agreements (or repos) co-exist with asset sales. In a repo, the seller agrees to repurchase the asset at a later date at the agreed price. Absent matching frictions, repos have no role. Introducing pairwise meetings, we show that agents prefer to sell asset whenever they face little uncertainty regarding the future use of the asset. As agents become more uncertain of the value of holding the asset, repos become more prevalent. We show that while the total volume of repos is always increasing with the uncertainty, the total sales volume is hump-shaped. In other words, pairwise matching alone is sufficient to explain why repo markets exist and there is no need to introduce information asymmetries or other market frictions.

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