Beyond segmentation: The case of China's repo markets

This paper explores the reasons behind the discrepancy between interest rates in China's two repurchase agreement (repo) markets, the interbank repo market and the exchange-traded repo market. The repo rates in the exchange market are at times, significantly higher than those in the interbank market, especially in the first three years of the 2000-2005 sample period. While market segmentation clearly hinders arbitrage, the causes of the repo rate discrepancy are related to the alternative investment opportunities available to market participants and to the volatility differences in the repo rates.