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Intermediation and Systemic Risk in the Repo Market

Presented by: 
A Tahbaz-Salehi Columbia University
Wednesday 27th August 2014 - 14:30 to 15:00
INI Seminar Room 1
Joint with M. di Maggio

In this paper, we focus on the financial institutions' role as intermediaries between cash lenders (e.g. money market funds) and borrowers (e.g. hedge funds). We show that, by charging a haircut, lenders can discipline the investment choices of all the participants in the market-even those with whom they are not directly contracting. However, haircuts can also work as a propagation mechanism among financial institutions: idiosyncratic shocks can be amplified over the network of interbank relationships, up to the point that the market freezes and its intermediation capacity collapses.
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University of Cambridge Research Councils UK
    Clay Mathematics Institute The Leverhulme Trust London Mathematical Society Microsoft Research NM Rothschild and Sons