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Federal Reserve Bank of Chicago
Working Paper Series
Special Repo Rates and the Cross-Section of Bond Prices: the Role of the Special Collateral Risk Premium
Stefania D'Amico
N. Aaron Pancost
Abstract

We estimate the joint term-structure of U.S. Treasury cash and repo rates using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a risk premium associated to the SC value of Treasuries and quantitatively link this premium to various price anomalies, such as the on-the-run premium. We show that a time-varying SC risk premium can explain between 74%–90% of the on-the-run premium, and is highly correlated with a number of other Treasury market anomalies. This suggests a commonality across these price anomalies, explicitly linked to the SC value of the highest-quality securities—recently-issued U.S. nominal Treasuries.


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Stefania D'Amico & N. Aaron Pancost, Special Repo Rates and the Cross-Section of Bond Prices: the Role of the Special Collateral Risk Premium, Federal Reserve Bank of Chicago, Working Paper Series WP-2018-21, 03 Dec 2018.
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Keywords: Bond prices; collateral; interest rates; risk premia
DOI: 10.21033/wp-2018-21
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