Paper: Special Repo Rates and the Cross-Section of Bond Prices: The Role of the Special Collateral Risk Premium

Stefania D’Amico, N Aaron Pancost
Review of Finance, Volume 26, Issue 1, February 2022

We price the risky component of specialness spreads—identified by their deviations from the expected auction cycle—within a dynamic term structure model estimated using daily prices of all outstanding Treasury securities and corresponding special collateral (SC) repo rates. This allows us to derive a time-varying SC risk premium that we quantitatively link to various price anomalies, such as the on-the-run premium. The SC risk premium explains about 80% of the on-the-run premium and a substantial share of other Treasury price anomalies, suggesting that unexpected fluctuations in the specialness spreads of recently issued nominal Treasury securities are a common risk factor.

The paper is available at

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