Before revision:  This article develops a  haircut model by treating repos as debt investments and seeks haircuts to control counterparty contingent exposure to asset price gap risk. It corroborates well with empirically stylized facts, explains tri-party and bilateral repo haircut differences, recasts haircut increases during the financial crisis , and sets a limit on access liquidity dealers can extract while acting as funding intermediaries between money market funds and hedge funds .
After revision:  This article develops a haircut model by designing haircuts to achieve high credit criteria, and identifies economic capital for repo's default risk as the main driver of repo pricing. A simple repo spread formula is obtained that relates spread to haircuts negative linearly. An investor wishing to minimize all-in funding cost can settle at an optimal combination of haircut and repo rate. The model empirically reproduces repo haircut hikes concerning asset backed securities during the financial crisis. It explains tri-party and bilateral repo haircut differences, recasts haircut increases during the financial crisis , and sets a limit on access liquidity dealers can extract while acting as funding intermediaries between money market funds and hedge funds .