A search-based theory of the on-the-run phenomenon

Dimitri Vayanos and Pierre-Olivier Weill

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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: E50 G10 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2007-01-27
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://eprints.lse.ac.uk/24474/ Open access version. (application/pdf)

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 (2006)
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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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24474

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