Repo transaction costs and balance sheet frictions

We develop an approach to quantify transaction costs in the repo market using OTC transaction data, where quoted bid-ask spreads are not observable. By estimating effective spreads at the level of individual trades, we construct a novel metric to evaluate intermediation costs across different segments of the market.

Effective spreads function as a high-frequency gauge of market conditions and functioning. They are particularly informative about balance sheet pressures, as reflected in recurring year-end spikes and elevated levels during the early stages of the COVID-19 pandemic. They offer complementary information to cash market spreads and provide a useful tool for further analysis of monetary policy transmission and the behavior of market participants.