Haircut, interest rate, and collateral quality in the tri-party repo market: Evidence and theory

Choi, Sangyup, Jang, Inkee, Kang, Kee-Youn ORCID: 0000-0003-4398-6079 and Kim, Hyunpyung (2026) Haircut, interest rate, and collateral quality in the tri-party repo market: Evidence and theory REVIEW OF ECONOMIC DYNAMICS, 61. 101351-. ISSN 1094-2025, 1096-6099

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Abstract

Using transaction-level data from the Korean tri-party repo market, we study how repo contract terms interact with collateral quality. Both haircuts and interest rates rise with collateral risk, consistent with existing evidence. Conditional on collateral quality, however, we find a trade-off: a one-percentage-point increase in the spread is associated with a 1.3-percentage-point reduction in the haircut. The same increase in the interest rate is associated with a smaller reduction in the haircut under heightened market uncertainty, indicating that insurance against default becomes more valuable as default risk rises. We show that the interaction between lenders’ incentives to acquire information and borrowers’ opportunistic default risk explains both the positive unconditional relationship and the negative conditional relationship between haircuts and interest rates.

Item Type:	Article
Uncontrolled Keywords:	Repo market, Collateralized debt, Haircut, Collateral quality, Costly information acquisition, Uncertainty
Divisions:	Faculty of Humanities & Social Sciences Faculty of Humanities & Social Sciences > School of Management Faculty of Humanities & Social Sciences > Faculty of Humanities & Social Sci (All T&R Staff) Faculty of Humanities & Social Sciences > School of Management > Economics Faculty of Humanities & Social Sciences > School of Management > School of Management (T&R Staff)
Depositing User:	Symplectic Admin
Date Deposited:	09 Jul 2026 09:45
Last Modified:	03 Aug 2026 15:21
DOI:	10.1016/j.red.2026.101351
Related Websites:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3199334
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