Peteris Kloks

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Kloks
First name
Peteris
Email
peteris.kloks@unisg.ch
Phone
+41 71 224 70 12

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    Item type:Research Project,
    Hiding in plain sight: preferred habitat effects in short-term rates *
    (2024-11-06)
    Mattille, Edouard  
    ;
    Augustin, Patrick
    ;
    Barbon, Andrea  
    ;
    Biais, Bruno
    ;
    Brown, Martin  
    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.