Securities Market Theory: Possession, Repo and RehypothecationJournal of Economic Theory (2012)
By introducing repo markets we understand how agents need to borrow issued securities before shorting them: (re)-hypothecation is at the heart of shorting. Non-negative amounts of securities in the box of an agent (amounts borrowed or owned but not lent on) can be sold, and recursive use of securities as collateral allows agents to leverage their positions. A binding box constraint induces a liquidity premium: the repo rate becomes special and the security price higher than expected discounted cash-flows. Existence of equilibrium is granted under limited re-hypothecation, a situation secured by (current or proposed) institutional arrangements.
Publication DateMarch, 2012
Citation InformationJean-Marc Bottazzi, Jaime Luque and Mario Pascoa. "Securities Market Theory: Possession, Repo and Rehypothecation" Journal of Economic Theory Vol. 147 Iss. 2 (2012)
Available at: http://works.bepress.com/luque/1/
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