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Staff Reports

Repo and the Liquidity Risk Premium

Number 1189
March 2026

JEL classification: G23, E58

Authors: Adam Copeland and Owen Engbretson

Securities dealers play a central role intermediating funds in the U.S. short-term money markets. This intermediation involves risk, which can be mitigated by holding buffers of liquid securities. The cost of holding these buffers—the liquidity risk premium—is driven by the opportunity cost of holding money and so is influenced by monetary policy. We use detailed data on the pricing of repurchase agreements (repo), the main contract used to provide secured funding in the money markets, to measure by how much changes in monetary policy affect the liquidity risk premium embedded in repo pricing. The results imply that both changes in administrative rates and in aggregate reserves have effects on this risk premium and that this relationship is nonlinear. Using the average values of rates and reserves in 2024, the estimated coefficients predict that a 100-basis-point increase in the interest rate on reserve balances results in a 0.9 basis point increase in the liquidity risk premium—a 10 percent increase in the spread charged by securities dealers to their clients. The same effect on this risk premium can be achieved by a $429 billion decrease in the aggregate reserves.

Full Article

Author Disclosure Statement(s)

Adam Copeland
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Owen Engbretson
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Suggested Citation:
Copeland, Adam, and Owen Engbretson. 2026. “Repo and the Liquidity Risk Premium.” Federal Reserve Bank of New York Staff Reports, no. 1189, March. https://doi.org/10.59576/sr.1189

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