Bubbles or convenience yields? A theoretical explanation with evidence from technology company equity carve-outs
AbstractThis paper offers an alternative explanation for what is typically referred to as an asset pricing bubble. We develop a model that formalizes the Cochrane (2002) convenience yield theory of technology company stocks to explain why a rational agent would buy an "overpriced" security. Agents have a desire to trade but short-sale restrictions and other frictions limit their trading strategies and enable prices of two similar securities to be different. Thus, divergent prices for similar securities can be sustained in a rational expectations equilibrium. The paper also provides empirical support for the model using a sample of 1996-2000 equity carve-outs.
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Bibliographic InfoArticle provided by Elsevier in its journal International Review of Economics & Finance.
Volume (Year): 18 (2009)
Issue (Month): 2 (March)
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Web page: http://www.elsevier.com/locate/inca/620165
Asset pricing Rational bubbles;
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