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. Agents enter into an infinite-horizon, steady-state market to establish long or short positions. Both the spot and the asset-lending market operate through search. Short-sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed. As a result, that asset enjoys both 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.

Keywords: On-the-run bonds; liquidity; specialness; search; arbitrage. JEL classification codes : G1; D8 (search for similar items in EconPapers)
JEL-codes: F3 G3 L81 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2005-04-23
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://eprints.lse.ac.uk/459/ 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 (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)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:459

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