Collateral Choice

This is the first paper studying collateral choices in one of the main short-term funding markets, the repurchase agreement (repo) market. In general collateral repos, the borrower can choose which bond he delivers as collateral out of a predefined list. Collateral availability and opportunity cost are the two main drivers of this collateral choice. In aggregate, on-the-run bonds are more likely to be delivered than cheapest-to-post securities which is surprising given that the former is more expensive. I rationalize those findings in a theoretical framework and show that bonds with higher repo delivery volumes have lower bond market liquidity.