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Bubbles or convenience yields? A theoretical explanation with evidence from technology company equity carve-outs

  • Bogan, Vicki
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    This 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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    File URL: http://www.sciencedirect.com/science/article/B6W4V-4PBDR4W-1/2/9adb8f6d2b23d205148be0f977541cdc
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    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 18 (2009)
    Issue (Month): 2 (March)
    Pages: 248-281

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    Handle: RePEc:eee:reveco:v:18:y:2009:i:2:p:248-281
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620165

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