Working Paper: CEPR ID: DP5965
Authors: Dimitri Vayanos; Pierre-Olivier Weill
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.
Keywords: asset pricing; liquidity; on-the-run bonds; search
JEL Codes: D8; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-sellers (G14) | asset liquidity (G32) |
| asset liquidity (G32) | trading volume (G15) |
| trading volume (G15) | asset liquidity (G32) |
| asset liquidity (G32) | liquidity premium (E41) |
| asset (G32) | specialness premium (G19) |
| liquidity premium + specialness premium (G19) | asset price (G19) |
| short-sellers (G14) | trading volume (G15) |