Yet Another Scarcity Premium: An Analysis on the Cost of Overnight Lending

Research completed by Marissa Thomas, graduated 2020 with Honors in Economics.

Abstract of research: The shadow banking sector has altered the credit creation process with significant effects on the real economy. The consequences that have taken place since have led to an evolution of monetary policy. For instance, trillions of dollars spent on the acquisition of non-traditional financially engineered assets. Leading to the effects of an enlarged balance sheet that seemingly spills into the economy. Thereby pushing the prices of collateral past their fundamentals. Such as, what was witnessed in the repo market in September 2019. Furthermore, the purpose of this study is to measure the premium that has been added to treasury collateral within the repurchase market (repo). Results indicate the existence of a statistically significant premium being added to off-the-run securities.