Determinants of repo haircuts and bankruptcy

Variations in repo haircuts play a crucial role in leveraging (or deleveraging) in security markets, as observed in the two major economic events that happened so far in this century, the US housing bubble that burst into the great recession and the European sovereign debts episode. Repo trades are secured but recourse loans. Default triggers insolvency. Collateral may be temporarily exempt from automatic stay but creditors' final reimbursement depends on the bankruptcy outcome. We show examples of bankruptcy equilibria. We infer how haircuts are related to asset or counterparty risks whenever a bankruptcy equilibrium exists.N/