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A search-based theory of the on-the-run phenomenon

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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Abstract

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)
Official URL: http://www.lse.ac.uk/collections/accountingAndFina...
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
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: AFA 2006 Boston Meetings Paper
Date Deposited: 10 Nov 2005
URL: http://eprints.lse.ac.uk/459/

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