Title: The Role of Margin and Spread in Secured Lending: Evidence from the Bilateral Repo Market
Abstract: We study secured lending contracts using a proprietary, loan-by-loan database of bilateral repurchase agreements containing groups of simultaneous loans backed by multiple tranches within a securitization. We show that lower-quality loans (defined as loans backed by lower-rated collateral) have higher margins and spreads. We calibrate a model using collateral asset prices and find that lower-quality loans are riskier despite the higher margins, yet cheaper for the borrower. This finding is consistent with a combination of lender optimism and reaching for yield. We also show that lower-quality loans have longer maturity, consistent with models of rollover concerns with asymmetric information.
Publication Year: 2015
Publication Date: 2015-01-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 4
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