Vayanos, Dimitri and Weill, Pierre-Olivier (2005) A search-based theory of the on-the-run phenomenon. AFA 2006 Boston Meetings Paper. American Finance Association.
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We propose a model in which assets with identical cash flows can trade at different prices. Agents enter into an infinite-horizon, steady-state market to establish long or short positions. Both the spot and the asset-lending market operate through search. Short-sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed. As a result, that asset enjoys both greater liquidity, measured by search times, and a higher lending fee ("specialness"). Liquidity and specialness translate into price premia that are consistent with no-arbitrage. We derive closed-form solutions for small frictions, and can generate price differentials in line with observed on-the-run premia.
|Item Type:||Monograph (Working Paper)|
|Additional Information:||Copyright © 2005 Dimitri Vayanos and Pierre-Olivier Weill. LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website.|
|Library of Congress subject classification:||H Social Sciences > HF Commerce
H Social Sciences > HG Finance
|Sets:||Departments > Accounting and Finance|
|Identification Number:||AFA 2006 Boston Meetings Paper|
|Date Deposited:||10 Nov 2005|
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