Date: 29 Jul 2021 (Thu)
Monthly Webinar Series 2021:
Capital Market Development: China and Asia
10:00 am – 11:10 am, Thursday (Beijing-Singapore Time)
10:00 pm, Wednesday (US Time / Eastern Time)
Repo market is an important source of wholesale funding for the financial institutions. Ever since Great Financial Crisis, repo haircut has been seen as a crucial barometer of the well-functioning of financial market. Theory predicts that repo haircuts increase with the collateral risk and counterparty risk. Using a proprietary transaction-level dataset from China’s interbank bilateral repo market, the authors empirically examine the determinants of repo haircut and test the theoretical predictions. It was found that haircut is increasing in both the default risk and the illiquidity risk of the collateral. The authors also find that haircut of the same collateral can differ across trading counterparties. Haircut on transaction between small banks which act as intermediaries in repo market are significantly lower than other transactions with the same collateral, implying that trading relationship may have an impact on haircut besides counterparty default risk. The authors exploit an unexpected event, the Baoshang Bank takeover, as a shock on the default risk of the intermediaries to explore the interplay of these factors during crisis episodes. The authors find that the takeover raised haircut for downstream institutions borrowing from intermediaries that are similar to Baoshang Bank. The increase in the counterparty risk further caused a cross-the-board increase in the haircut on low-quality collaterals, suggesting an information spillover effect. The authors further explore the dynamics of the haircuts during the COVID-19 outbreak. The authors find that the haircuts increased for illiquid- and pandemic-sensitive collaterals. The authors do not find evidence to support an increase in the counterparty risk during the pandemic.
Hanming FANG, Joseph M. Cohen Term Professor of Economics, University of Pennsylvania and Senior Fellow, ABFER
Yongqin WANG Associate Professor of Economics, School of Economics, Fudan University
Xian WU PhD Student, Department of Economics, University of Wisconsin-Madison
Arvind Krishnamurthy, The John S. Osterweis Professor of Finance, Stanford Graduate School of Business, Stanford University and Senior Fellow, ABFER
Each session lasts for 1 hour 10 minutes (25 minutes for the author, 25 minutes for the discussant and 20 minutes for participants' Q&A). Sessions will be recorded and posted on ABFER's web, except in cases where speakers or discussants request us not to.
Please register in http://abfer.org/events/abfer-events/212:webinarseries2021reg. A unique Zoom webinar link will be sent to you two days before the event. (Notice: Videos and screenshots will be taken during each session for the purpose of marketing, publicity purposes in print, electronic and social media)
Zhiguo HE, Jun PAN, Michael SONG, Bernard YEUNG, Bohui ZHANG, Xiaoyan ZHANG (co-chaired by Zhiguo HE and Bernard YEUNG)
ABFER and University of Chicago's Becker Friedman Institute China (BFI-China)
National University of Singapore (NUS) Business School, Shanghai Advanced Institute of Finance (SAIF), The Chinese University of Hong Kong (CUHK) Department of Economics, CUHK-Shenzhen and Tsinghua University PBC School of Finance (Tsinghua PBCSF)