Bubbles or convenience yields? A theoretical explanation with evidence from technology company equity carve-outs

Vicki Bogan

International Review of Economics & Finance, 2009, vol. 18, issue 2, 248-281

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: Asset; pricing; Rational; bubbles (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (2)

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