|dc.description.abstract||This thesis consists of three essays, with each comprised of an empirical analysis of microstructural issues in over-the-counter interbank markets. It uses a confidential transaction-level database from the Australian fixed-income market that is comprehensive in scope, covering virtually all cash trades and repurchase agreements across multiple asset classes over an extended 7.5-year period. To exploit this wide scope, the essays are framed to investigate issues that have both a strong policy import (given the prominence of over-the-counter and collateral markets during the Global Financial Crisis) and the potential to remedy a gap in the academic literature (given they have been largely ignored by prior researchers due to data limitations).
The first paper addresses the question of whether bank relationships affect asset prices. Using simple intuition, it conjectures that traders have a natural incentive to circumvent search frictions by entering bilateral relationships (in contrast to random matching in current theoretical approaches); to compensate for this immediacy, however, an initiating relationship trader sacrifices a higher execution cost relative to search-based trades. By focusing on cash trades across several safe and homogenous asset classes, the paper then tests this hypothesis in a setting that isolates countervailing information frictions. The results, which include extensive robustness checks across normal and crisis periods, provide strong support to the central hypothesis.
The second paper addresses the question of whether global banks react to shocks in their home countries by adjusting their bond inventories in geographically-distant markets. Using a difference-in-differences methodology with fixed effects, it examines the relationship between daily U.S. interbank funding shocks and the Australian fixed-income holdings of exposed foreign branches. In line with expectations, the analysis shows that global banks reduce their Australian bond holdings after increases in their U.S. interbank funding costs. Moreover, the variability in the results is consistent with fire-sale theory (Shleifer and Vishny, 1992): the effect is present across asset classes, stronger during the crisis when most global banks were highly capital-constrained and stronger for higher value bonds with a lower fire-sale cost. A supplementary analysis then finds some evidence that these holdings adjustments negatively affected market outcomes, including prices and liquidity.
The third paper addresses the question of whether the novel phenomenon of collateral reuse (commonly referred to as rehypothecation) acts as a direct funding mechanism for intermediating banks in repo markets. In addition to one of the first exploratory analyses of this phenomenon, the paper tests a new theoretical literature that models how dealers set haircut margins between source repos and secondary reuse repos backed by the same collateral. The analysis surprisingly finds that haircut spreads are negative, suggesting that on average dealers incur a net loss between the two initial repo legs. Nonetheless, the regression analysis finds that the determinants of haircut spreads are more intuitive and consistent with theoretical predictions; for instance, haircut spreads are negatively related to the delayed income obtained from interest rate spreads, and positively related (albeit weak evidence) to the dealer’s funding costs.
Both individually and as a whole, these studies add to our current understanding of over-the-counter markets in ways that are of interest to academics and regulators alike. The first paper introduces and presents evidence consistent with an alternative conception of trading that synthesises the ubiquitous notion of search costs with the empirical dominance of bilateral relationships; it broadly underscores the importance of considering both these intertwined factors for a proper understanding of the dynamics of price formation and liquidity in such markets. The second paper extends the shock transmission literature from loan markets – which it is currently largely constrained to – to a fundamentally different, secondary-asset-market setting; such research is intrinsically connected to the issue of systemic risk, which is at the fore of current global banking regulation movements. And finally, the third paper presents one of the first empirical analyses on rehypothecation, a novel and widely-unknown practice that has the potential for far-reaching implications given increasing collateralisation of both financial and non-financial transactions worldwide; it also provides the first test of theoretical models that conjecture its use as a direct funding mechanism.||en_AU|
|dc.publisher||University of Sydney||en_AU|
|dc.publisher||Sydney Business School||en_AU|
|dc.rights||The author retains copyright of this thesis. It may only be used for the purposes of research and study. It must not be used for any other purposes and may not be transmitted or shared with others without prior permission.||en_AU|
|dc.title||Three Essays on the Microstructure of Over-the-Counter Interbank Markets||en_AU|
|dc.type.pubtype||Doctor of Philosophy Ph.D.||en_AU|
|dc.description.disclaimer||Access is restricted to staff and students of the University of Sydney . UniKey credentials are required. Non university access may be obtained by visiting the University of Sydney Library.||en_AU|
|Appears in Collections:||Sydney Digital Theses (University of Sydney Access only)|