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Economics 434 Theory of Financial Markets

Economics 434 Theory of Financial Markets. Professor Edwin T Burton Economics Department The University of Virginia. The Money Markets. Treasury bills Commercial paper Includes ABCP Not more than 270 days to maturity in order to avoid SEC filing Repo market. The Repo Market.

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Economics 434 Theory of Financial Markets

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  1. Economics 434Theory of Financial Markets Professor Edwin T Burton Economics Department The University of Virginia

  2. The Money Markets • Treasury bills • Commercial paper • Includes ABCP • Not more than 270 days to maturity in order to avoid SEC filing • Repo market

  3. The Repo Market • “Repo” means repurchase agreement (seller of security agrees to repurchase it at a later date at a fixed price) • In reality • Doing a repo is a loan (investment) of cash receiving treasury collateral • The other side of the trade is a “reverse repo”

  4. A Repo A Does a Repo Sends $ 100 million in cash to A B B Sends $ 105 million in treasury bills to A B is doing a reverse repo

  5. Other interpretations of the same transaction • A Does a repo • A might be borrowing a security and providing cash collateral • B would then be lending a security and receiving cash collateral

  6. Implication of Repo Market for Fed Reserve Funds Target • Reserves can be augmented or reduced by acting in the federal funds market or the repo market (or in other markets) • Repo market is far, far larger than funds market • It is more likely that Repo rate sets Funds rate than the other way around • Hence, Fed cannot control Fed Funds rate, as is commonly believed

  7. The End

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