Bubbles or Convenience Yields? A Theoretical Explanation with Evidence from Technology Company Equity Carve-Outs

Vicki Bogan

No 127045, Working Papers from Cornell University, Department of Applied Economics and Management

Abstract: This paper offers an alternative explanation for what is typically referred to as an asset pricing bubble. We develop a model that formalizes the Cochrane (2002) convenience yield theory of technology company stocks to explain why a rational agent would buy an “overpriced” security. Agents have a desire to trade but short-sale restrictions and other frictions limit their trading strategies and enable prices of two similar securities to be different. Thus, divergent prices for similar securities can be sustained in a rational expectations equilibrium. The paper also provides empirical support for the model using a sample of 1996 - 2000 equity carve-outs.

Keywords: Research; and; Development/Tech; Change/Emerging; Technologies (search for similar items in EconPapers)
Pages: 59
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:ags:cudawp:127045

DOI: 10.22004/ag.econ.127045

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