Explaining Repo Specialness

We study the dynamics of specialness for 1-day repo contracts on Italian Government bonds over a 10-year sample period. Our results show that collateral supply is a significant factor for specialness, along with repo liquidity, information uncertainty and short-selling proxies that reveal the importance of speculative bond demand for specialness. We identify recurrent patterns for specialness around bond auctions. Specialness increases steadily from the auction announcement date until few days before the auction settlement date, which is consistent with an overbidding behaviour of primary dealers. During crisis periods, bond fire-sales and ECB interventions have a large impact on repo specialness.