A Search-Based Theory of the On-the-Run Phenomenon
We propose a model in which assets with identical cash flows can trade at different prices. Infinitely lived agents can establish long positions in a search spot market, or short positions by first borrowing an asset in a search repo market. We show that short-sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed. That asset enjoys greater liquidity, a higher lending fee ("specialness"), and trades at a premium consistent with no-arbitrage. We derive closed-form solutions for small frictions, and provide a calibration generating realistic on-the-run premia. Copyright (c) 2008 by The American Finance Association.
Year of publication: |
2008
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Authors: | VAYANOS, DIMITRI ; WEILL, PIERRE-OLIVIER |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 63.2008, 3, p. 1361-1398
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Publisher: |
American Finance Association - AFA |
Saved in:
freely available
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