EconPapers    
Economics at your fingertips  
 

Margin-Based Asset Pricing and Deviations from the Law of One Price

Nicolae Gârleanu and Lasse Pedersen

No 16777, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a model with heterogeneous-risk-aversion agents facing margin constraints, we show how securities' required returns are characterized both by their betas and their margin requirements. Negative shocks to fundamentals make margin constraints bind, lowering risk-free rates and raising Sharpe ratios of risky securities, especially for high-margin securities. Such a funding-liquidity crisis gives rise to "bases," that is, price gaps between securities with identical cash-flows but different margins. In the time series, bases depend on the shadow cost of capital, which can be captured through the interest-rate spread between collateralized and uncollateralized loans, and, in the cross section, they depend on relative margins. We test the model empirically using the CDS-bond bases and other deviations from the Law of One Price, and use it to evaluate central banks' lending facilities.

JEL-codes: E02 E44 G01 G12 G13 (search for similar items in EconPapers)
Date: 2011-02
Note: AP EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (136) Track citations by RSS feed

Published as Nicolae G�rleanu & Lasse Heje Pedersen, 2011. "Margin-based Asset Pricing and Deviations from the Law of One Price," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1980-2022.

Downloads: (external link)
http://www.nber.org/papers/w16777.pdf (application/pdf)

Related works:
Journal Article: Margin-based Asset Pricing and Deviations from the Law of One Price (2011) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:16777

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w16777

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2020-05-18
Handle: RePEc:nbr:nberwo:16777