IFin Seminar, Loriana Pelizzon, Leibniz Institute SAFE & Goethe University Frankfurt - Inelastic Demand and Elastic Supply: Pricing in the Repo Market
Institute of Finance
Date: 7 May 2026 / 12:25 - 13:40
Speaker: Loriana Pelizzon, Leibniz Institute SAFE & Goethe University Frankfurt
Title: Inelastic Demand and Elastic Supply: Pricing in the Repo Market
Date: 07.05.2026
Time: 12:25 - 13:40
Room: Blue Room - Executive Center West Campus
Abstract
Repo specialness—the spread between the policy rate and the repo rate on specific collateral—impairs monetary policy transmission and distorts relative bond pricing. Existing research points to collateral scarcity following central bank asset purchases as its main driver, but scarcity cannot explain why specialness prevails even when collateral supply is stable. We show, both theoretically and empirically, that repo specialness is an equilibrium outcome of imbalances in the cash bond market. Preferred-habitat investors push cash bond prices above synthetically equivalent exposures. Hedge funds accommodate this excess demand by shorting bonds, borrowing bonds in the repo market. Repo demand is therefore pinned down by the cash-market imbalance—making hedge funds inelastic in the repo market, despite their reputation as the most elastic participants in financial markets. Using novel regulatory transaction-level data for the repos backed by German sovereign bonds, we identify final security borrowers and lenders, and estimate sector-specific elasticities. Repo (collateral) supply, dominated by the public sector, is highly elastic; demand, driven by hedge funds, is strongly inelastic. Our results provide a unified framework that links bond-market demand pressures to repo pricing, with implications for theoretical asset pricing models and the design of monetary policy operations.