A Search-Based Theory of the On-the-Run Phenomenon

Dimitri Vayanos and Pierre-Olivier Weill

No 12670, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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, 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.

JEL-codes: D8 G1 (search for similar items in EconPapers)
Date: 2006-11
New Economics Papers: this item is included in nep-mst
Note: AP
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Citations: View citations in EconPapers (8)

Published as Dimitri Vayanos & Pierre-Olivier Weill, 2008. "A Search-Based Theory of the On-the-Run Phenomenon," Journal of Finance, American Finance Association, vol. 63(3), pages 1361-1398, 06.

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Related works:
Journal Article: A Search‐Based Theory of the On‐the‐Run Phenomenon (2008)
Working Paper: A search-based theory of the on-the-run phenomenon (2007)
Working Paper: A Search-Based Theory of the On-the-Run Phenomenon (2007)
Working Paper: A Search-Based Theory of the On-the-Run Phenomenon (2006)
Working Paper: A search-based theory of the on-the-run phenomenon (2005)
Working Paper: A Search-Based Theory of the On-the-Run Phenomenon (2005)
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