Edouard Mattille
Last Name
Mattille
First name
Edouard
Email
edouard.mattille@unisg.ch
Phone
+41 79 760 3883
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Item type:Publication, Hiding in plain sight: preferred habitat effects in short-term rates *(2024-11-06)This paper investigates the failure of the expectations hypothesis (EH) in an ideal yet critical setting: repurchase (repo) agreements, the short-term funding market underlying interbank lending. I exploit a regulatory reform which shortened the settlement cycle of bond markets to identify a preferred habitat of agents using repo to fund their fixed income positions. A tripledifferences identification strategy demonstrates that this shock deteriorated the EH performance of the treated segment, implying that preferred habitat effects can distort pricing even in optimal conditions. I argue that collateral scarcity and fragmentation act as a limit to arbitrage. My results further highlight a concerning usage of repo to finance leveraged positions.Type:working paper