Abstract/Summary

This thesis contributes to the broad body of research in the area of money markets, and focuses on repurchase agreements (repos). In the three main chapters of the thesis, I empirically investigate the determinants of the funding liquidity in the repo markets, and the interconnections between the repo markets and the sovereign bond markets. First, I evaluate the impact of sovereign bond riskiness, repo riskiness and treasury auctions on the security-specific costs of procuring Italian government bonds as collaterals (which I call repo specialness) for 1-day repo contracts. I provide evidence that bond supply and riskiness, repo liquidity,speculative demand, bond fire-sales and the unconventional interventions by the European Central Bank (ECB) drive the repo specialness. Additionally, I identify recurrent patterns for specialness around bond auctions, which are consistent with an overbidding behaviour of primary dealers. Next, I explain the intraday variations of the spread between the rate of Italian GC overnight repos and the ECB deposit rate. The intraday repo spread is higher in the morning than in the afternoon, suggesting that banks ensure funding liquidity at the beginning of the day for prudential liquidity management. Collateral riskiness, repo riskiness, and the excess liquidity provided by the ECB affect the intraday repo spread. Moreover, bond supply, liquidity, modified duration, repo specialness and the margin costs determine the selection of bonds used in GC repos. Finally, I analyse which factors explain the use of CCP-based repos with respect to bilaterally-traded (BIL) repos on Italian Treasuries, as well as the difference of their repo rates. When general market uncertainty increases, CCP repos are preferred to bilateral-traded repos. However, banks demand a risk premium on top of the BIL repo rate when the margin costs are above their median value, suggesting that higher margins make it less attractive to trade via CCPs.