Price Formation of Pledgeable Securities

Andrea Pinna ()
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Andrea Pinna: Free University of Bolzano‐Bozen, Faculty of Economics and Management

No BEMPS26, BEMPS - Bozen Economics & Management Paper Series from Faculty of Economics and Management at the Free University of Bozen

Abstract: I derive the equilibrium price function of securities that can be pledged as collateral, in an economy where rational investors receive heterogeneous information. Although the distribution of borrowers' and lenders' payoffs is truncated, the linear equilibrium price is in closed form. That allows to investigate the impact of pledgeability on informational efficiency. The margin premium depends on the price of liquidity and yields a "pledgeability bias", which increases the conditional volatility of the price function. The impact of pledgeability on prices contributes to explain excessive comovement and seemingly violations of the law of one price.

Keywords: REE; Collateral; Analytic solution; Price Informativeness (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: [32 pages]
Date: 2015-01
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