SELECTED WORKS

Publications

Securities Market Theory: Possession, Repo and Rehypothecation

Journal of Economic Theory (2012)

Jaime Luque
Jean-Marc Bottazzi
Mario Pascoa

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).

Economic Theory, Finance and Public Economics

March, 2012

Jean-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/

Creative Commons License This work is licensed under a Creative Commons CC_BY-NC-ND International License.