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Intermediation and Systemic Risk in the Repo Market

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Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches

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.

This talk is part of the Isaac Newton Institute Seminar Series series.

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