Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154226
Authors: 
Lennkh, Rudolf Alvise
Walch, Florian
Year of Publication: 
2015
Series/Report no.: 
ECB Working Paper 1793
Abstract: 
Transaction cost shocks in financial markets are known to affect asset prices. This paper analyses how changes in transaction costs may affect the value of assets that banks use to collateralise borrowings in monetary policy operations. Based on a simple asset pricing model and employing a dataset of hypothetical Eurosystem collateral positions, we simulate and quantify the resulting change in collateral value pledged by counterparties to the Eurosystem, resulting from a transaction cost shock. A 10 basis point increase in transaction costs entails a direct -0.30% decrease of collateral value and a -0.07% decrease when adjusted for the expected reduction in the number of trades of each asset. We conclude that banks will on average suffer small collateral losses while selected institutions could face a considerably larger collateral decrease.
Subjects: 
Central Bank
collateral
monetary policy
transaction cost
JEL: 
C15
E59
G12
ISBN: 
978-92-899-1606-6
Document Type: 
Working Paper

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