Determinants of Repo Haircuts and Bankruptcy.- Jean-Marc Bottazzi, Mário R. Páscoa, Guillermo Ramírez

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  • Last update: 17 November 2017
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  • Author: Jean-Marc Bottazzi, Mário R. Páscoa, Guillermo Ramírez

Abstract

Variations in repo haircuts play a crucial role in leveraging (or deleveraging) in security
markets, as observed in the two major economic events that happened so far in this century,
the US housing bubble that burst into the great recession and the European sovereign debts
episode. Repo trades are secured but recourse loans. Default triggers insolvency. Collateral
may be temporarily exempt from automatic stay but creditors' final reimbursement depends
on the bankruptcy outcome. We show examples of bankruptcy equilibria. We infer how
haircuts are related to asset or counterparty risks whenever a bankruptcy equilibrium exists.