``Limits of Arbitrage" theories require that the marginal investor in a particular asset market be a specialized arbitrageur. Then the constraints faced by this arbitrageur (i.e. capital constraints) feed through into asset prices. We examine the mortgage-backed securities (MBS) market in this light, as casual empiricism suggests that investors in the MBS market do seem to be very specialized. We show that risks that seem relatively minor for aggregate wealth are priced in the MBS market. A simple pricing kernel based on the aggregate value of MBS securities prices risk in the MBS market. The evidence suggests that limits of arbitrage theories can help explain the behavior of spreads in this market.
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Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2005.
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Nicolae Gârleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009.
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0035, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 53--56 Great Sutton Street, London EC1V 0DG.
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Ralph S.J Koijen & Otto Van Hemert & Stijn Van Nieuwerburgh, 2007.
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13361, National Bureau of Economic Research, Inc.
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Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009.
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Elsevier, vol. 93(2), pages 292-324, August.
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John Y. Campbell, 2006.
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John Y. Campbell, 2006.
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Journal of Finance,
American Finance Association, vol. 61(4), pages 1553-1604, 08.
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Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2005.
"Demand-Based Option Pricing,"
NBER Working Papers
11843, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Nicolae Gârleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009.
"Demand-Based Option Pricing,"
Review of Financial Studies,
Oxford University Press for Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
[Downloadable!] (restricted)