Securities market theory: possession, repo and rehypothecation

Jean Marc Bottazzi, Jaime Luque, Mário R. Páscoa

Research output: Contribution to journalArticlepeer-review

20 Citations (Scopus)


By introducing repo markets we understand how agents need to borrow issued securities before shorting them: (re)-hypothecation is at the heart of shorting. Non-negative amounts of securities in the box of an agent (amounts borrowed or owned but not lent on) can be sold, and recursive use of securities as collateral allows agents to leverage their positions. A binding box constraint induces a liquidity premium: the repo rate becomes special and the security price higher than expected discounted cash-flows. Existence of equilibrium is guaranteed under limited re-hypothecation, a situation secured by (current or proposed) institutional arrangements.

Original languageEnglish
Pages (from-to)477-500
Number of pages24
JournalJournal of Economic Theory
Issue number2
Publication statusPublished - 1 Mar 2012


  • Collateral
  • Issuing
  • Leverage
  • Re-hypothecation
  • Repo
  • Repo collateral multiplier
  • Security pricing
  • Short sale
  • Specialness


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