Price Formation of Pledgeable Securities

Andrea Pinna

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

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; Price informativeness; collateral; Analytic solution (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:201511

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