How does the repo market behave under stress? Evidence from the COVID-19 crisis

Hüser, Anne-Caroline, Lepore, Caterina and Veraart, Luitgard A. M. ORCID: 0000-0003-1183-2227 (2024) How does the repo market behave under stress? Evidence from the COVID-19 crisis. Journal of Financial Stability, 70. ISSN 1572-3089

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Abstract

We examine how the repo market operates during liquidity stress by applying network analysis to novel transaction-level data of the overnight gilt repo market including the COVID-19 crisis. We find that during this crisis the repo network becomes more connected, with most institutions relying on previously used counterparties. There are however important changes in the repo volumes and spreads during the stress relative to normal times. There is a significant increase in volumes traded with the central counterparties (CCPs) sector. At the same time non-banks, except hedge funds, decrease borrowing and face higher spreads in the bilateral segment. Overall, this evidence reflects a preference for dealers and banks to transact in the centrally cleared rather than the bilateral segment. Our results can inform the policy debate around the behaviour of banks and non-banks in recent liquidity stress and on widening participation in CCPs by non-banks.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-f...
Additional Information:	© 2023 The Author(s)
Divisions:	Mathematics
Subjects:	H Social Sciences > HG Finance R Medicine > RA Public aspects of medicine > RA0421 Public health. Hygiene. Preventive Medicine H Social Sciences > HV Social pathology. Social and public welfare. Criminology
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G10 - General G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation
Date Deposited:	11 Jan 2024 12:57
Last Modified:	17 Feb 2024 00:19
URI:	http://eprints.lse.ac.uk/id/eprint/121347

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