Theory and Evidence
14:00 - 16:00
Professor Kjell G. Nyborg
Lectures, talks and seminars
Essex Finance Centre
Essex Business School
Essex Finance Centre is delighted to welcome Professor Kjell G. Nyborg to our weekly research seminar series to present his paper, titled 'Repo Rates and the Collateral Spread Puzzle: Theory and Evidence'.
The collateral spread is the unsecured rate less the repo rate. The puzzle is that this is frequently negative. We develop a theory of repos motivated by the need to generate liquidity. Players are risk averse (but risk neutrality is also covered). Trading in the security cash market is an alternative to repo. Unsecured borrowing constraints generate a constrained-arbitrage relation between the repo rate, the security cash market expected rate of return, and the unsecured rate. The repo rate may rise above the unsecured rate if the cash market adjusted rate does so too. Thus, negative collateral spreads may be a symptom of especially low unsecured rates or depressed securities prices. Collateral spreads increase in haircuts and decrease in volatility. The theory is tested using data from Eurex Repo. The findings are supportive. Finally, we use the theory to provide a narrative of the evolution of collateral spreads in the euro area over time.
Kjell G. Nyborg is Chaired Professor of Finance at the University of Zurich, Senior Chair of the Swiss Finance Institute, Research Fellow of the Centre for Economic Policy Research, and Fellow of the Royal Society of Arts. He is also a former Director and the current Vice President and President-elect of the European Finance Association. Professor Nyborg studied mathematics and economics at the University of Chicago before going on to do a PhD, with a specialization in finance, at the Graduate School of Business, Stanford University. He has previously taught at London Business School, UCLA, and the Norwegian School of Economics. His recent work focuses on issues relating to central banking, liquidity, and collateral, as, for example, represented by his forthcoming book “Collateral Frameworks: The Open Secret of Central Banks” on Cambridge University Press.