Review of Finance Vol. 26 No. 1 2022
Special Repo Rates and the Cross-Section of Bond Prices: The Role of the Special Collateral Risk Premium
Abstract
We price the risky component of specialness spreads—identified by their deviations from the expected auction cycle—within a dynamic term structure model estimated using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a time-varying SC risk premium that we quantitatively link to various price anomalies, such as the on-the-run premium. The SC risk premium explains about 80% of the on-the-run premium and a substantial share of other Treasury price anomalies, suggesting that unexpected fluctuations in the specialness spreads of recently issued nominal Treasury securities are a common risk factor.
- DOI
- 10.1093/rof/rfab028
- Volume
- 26
- Issue
- 1
- Pages
- 117-162
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref