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This paper studies the impact of funding market frictions on bond prices and market-wide liquidity. Using proprietary transaction-level data on all gilt-backed repo and reverse-repo trades, we demonstrate how the market power of individual dealers and their linkages generate frictions. Specifically, we show that frictions related to market power account for between 0.5 and 1.3 percentage points of bond yield deviatio…
A repurchase agreement lets investors borrow cash to buy securities. Financier only lends to securities' market value after a haircut and charges interest. Repo pricing is characterized with its puzzling dual pricing measures: repo haircut and repo spread. This article develops a repo haircut model by designing haircuts to achieve high credit criteria, and identifies economic capital for repo's default risk as the ma…
There is an observed basis between repo discounting, implied from market repo rates, and bond discounting, stripped from the market prices of the underlying bonds. Here, this basis is explained as a convexity effect arising from the decorrelation between the discount rates for derivatives and bonds. Using a Hull-White model for the discount basis, expressions are derived that can be used to interpolate the repo rates…
Although not a formal pricing consideration, gap risk or hedging errors are the norm of derivatives businesses. Starting with the gap risk during a margin period of risk of a repurchase agreement (repo), this article extends the Black-Scholes-Merton option pricing framework by introducing a reserve capital approach to the hedging error's irreducible variability. An extended partial differential equation is derived wi…
The general and special repo rates are related with the prices of the European call- and American put-options. The evaluation takes into account specific business models of the parties in the repo agreement and the law restrictions. Using the repo-option relation, an alternative to the Black-Scholes method of option pricing is presented. The empirical data on the general and special repo rates are explained.
ABSTRACT The repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis, based in part on findings that margins increased sharply in a segment of this market. This paper provides evidence suggesting that there was no system‐wide run on repo. Using confidential data on tri‐party repo, a major segment of this market, we show that, the level of margins and the amou…
In its capacity as debt issuer, the state has played a growing role in financial life over the last 30 years. To examine this role and connect it to shadow banking, the paper develops the concept of the ‘repo trinity’, which captures a set of policy objectives that central banks outlined after the 1998 Russian crisis, the first systemic crisis of collateral-based finance. The repo trinity connected financial stabilit…
The search for a market design that ensures stable bank funding is at the top of regulators' policy agenda. This paper empirically shows that the central counterparty (CCP)-based euro interbank repo market features this stability. Using a unique and comprehensive data set, we show that the market is resilient during crisis episodes and may even act as a shock absorber, in the sense that repo lending increases with ri…
As the financial crisis deepened and unsecured interbank markets effectively shut down, repo market activity became increasingly concentrated in the very shortest maturities and against the highest-quality collateral. Repo rates for US Treasury collateral fell relative to overnight index swap rates, while comparable sovereign repo rates in the euro area and the United Kingdom rose. The different dynamics across marke…
1. INTRODUCTION During the financial crisis of 2007-09, particularly around the time of the Bear Stearns and Lehman Brothers failures, it became apparent that weaknesses existed in the design of the U.S. tri-party repo market, used by major broker-dealers to finance their inventories of securities. These design weaknesses had the potential to rapidly elevate and propagate systemic risk. Following the crisis, an indus…
This study identifies and quantifies a significant informational friction embedded in the SEC Form 144 disclosure regime, characterized as predictive decoupling. Drawing on a theoretical foundation of welfare economics, the article argues that the current reporting inversion -- where trade execution (Form 4) frequently precedes the public notice of intent (Form 144) -- violates the conditions for Pareto efficiency by…
We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear mathematical problem features semilinear PDEs and FBSDEs. We show that for the benchmark vulnerable claim there is an analytical solution, and we express it in terms of the Black-Scholes for…
Before the 2008 financial crisis, most research in financial mathematics focused on pricing options without considering the effects of counterparties' defaults, illiquidity problems, and the role of the sale and repurchase agreement (Repo) market. Recently, models were proposed to address this by computing a total valuation adjustment (XVA) of derivatives; however without considering a potential crisis in the market.…
Corporate credit rating serves as a crucial intermediary service in the market economy, playing a key role in maintaining economic order. Existing credit rating models rely on financial metrics and deep learning. However, they often overlook insights from non-financial data, such as corporate annual reports. To address this, this paper introduces a corporate credit rating framework that integrates financial data with…
The proliferation of artificial intelligence (AI) in financial services has prompted growing demand for tools that can systematically detect AI-related disclosures in corporate filings. While prior approaches often rely on keyword expansion or document-level classification, they fall short in granularity, interpretability, and robustness. This study introduces FinAI-BERT, a domain-adapted transformer-based language m…
This article applies natural language processing (NLP) to extract and quantify textual information to predict stock performance. Using an extensive dataset of Chinese analyst reports and employing a customized BERT deep learning model for Chinese text, this study categorizes the sentiment of the reports as positive, neutral, or negative. The findings underscore the predictive capacity of this sentiment indicator for …
Financial sentiment analysis (FSA) is crucial for evaluating market sentiment and making well-informed financial decisions. The advent of large language models (LLMs) such as BERT and its financial variant, FinBERT, has notably enhanced sentiment analysis capabilities. This paper investigates the application of LLMs and FinBERT for FSA, comparing their performance on news articles, financial reports and company annou…
For a financial analyst, the question and answer (Q\&A) segment of the company financial report is a crucial piece of information for various analysis and investment decisions. However, extracting valuable insights from the Q\&A section has posed considerable challenges as the conventional methods such as detailed reading and note-taking lack scalability and are susceptible to human errors, and Optical Character Reco…
Commodity Inventory Financing — Repo-like financing of physical stocks linking curve to rates.
A debt covenant is a contractual limit on the borrower — maintain a ratio, not do a thing, or report a thing — that turns a miss into a default or a fee.
Greeks are the sensitivities of option value to spot, vol, time, and rates — the risk report of a non-linear book.
General collateral (GC) is repo against a basket of acceptable Treasuries (or other eligible bonds) rather than a specific CUSIP — the opposite of specials.
Nonfarm Payrolls — The headline US jobs report that routinely moves rates, FX, and equity index volatility.
The 2007–09 global financial crisis was a wholesale-run on securitized credit and dealer balance sheets after US housing turned — the modern template for shadow-bank runs, fire sales, and a central-bank-as-market-maker.
Mid-September 2019 US GC/SOFR printed in the double digits for a day as reserves met a tax date and bill supply — a plumbing scare that created the standing repo facility debate.
Reverse Repo Facility usage shows how much cash is being parked at the Federal Reserve overnight and helps track reserve distribution, collateral demand, and system liquidity conditions.
SOFR is the Secured Overnight Financing Rate, a key benchmark for U.S. dollar funding based on overnight Treasury repo transactions.
Standing Repo Facility — The Fed backstop for repo market dysfunction and dealer balance-sheet pressure.
Repo rates reflect the cost of short-term secured borrowing against collateral and are central to understanding liquidity, Treasury market functioning, and funding stress.
Feature Store — Centralized repository for model features ensuring consistency between research and production.
Commodity Inventory Financing — Repo-like financing of physical stocks linking curve to rates.
A debt covenant is a contractual limit on the borrower — maintain a ratio, not do a thing, or report a thing — that turns a miss into a default or a fee.
Feature Store — Centralized repository for model features ensuring consistency between research and production.
General collateral (GC) is repo against a basket of acceptable Treasuries (or other eligible bonds) rather than a specific CUSIP — the opposite of specials.
Nonfarm Payrolls — The headline US jobs report that routinely moves rates, FX, and equity index volatility.
Greeks are the sensitivities of option value to spot, vol, time, and rates — the risk report of a non-linear book.
Repo rates reflect the cost of short-term secured borrowing against collateral and are central to understanding liquidity, Treasury market functioning, and funding stress.
Mid-September 2019 US GC/SOFR printed in the double digits for a day as reserves met a tax date and bill supply — a plumbing scare that created the standing repo facility debate.
Reverse Repo Facility usage shows how much cash is being parked at the Federal Reserve overnight and helps track reserve distribution, collateral demand, and system liquidity conditions.
SOFR is the Secured Overnight Financing Rate, a key benchmark for U.S. dollar funding based on overnight Treasury repo transactions.
Standing Repo Facility — The Fed backstop for repo market dysfunction and dealer balance-sheet pressure.