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Asset Mispricing

Kurt Lewis (), Francis Longstaff and Lubomir Petrasek

No 23231, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use a unique dataset of corporate bonds guaranteed by the full faith and credit of the U.S. to test a number of recent theories about why asset prices may diverge from fundamental values. These models emphasize the role of funding liquidity, slow-moving capital, the leverage of financial intermediaries, and other frictions in allowing mispricing to occur. Consistent with theory, we find there are strong patterns of commonality in mispricing and that changes in dealer haircuts and funding costs are significant drivers of mispricing. Furthermore, mispricing can trigger short-term margin and funding-cost spirals. Using detailed bond and dealer-level data, we find that most of the cross-sectional variation in mispricing is explained by differences in dealer funding costs, inventory positions, and trading liquidity measures. These results provide strong empirical support for a number of current theoretical models.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-fmk
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