Margin-based Asset Pricing and Deviations from the Law of One Price
In a model with heterogeneous-risk-aversion agents facing margin constraints, we show how securities' required returns increase in both their betas and their margin requirements. Negative shocks to fundamentals make margin constraints bind, lowering risk-free rates and raising Sharpe ratios of risky securities, especially for high-margin securities. Such a funding-liquidity crisis gives rise to "bases," that is, price gaps between securities with identical cash-flows but different margins. In the time series, bases depend on the shadow cost of capital, which can be captured through the interest-rate spread between collateralized and uncollateralized loans and, in the cross-section, they depend on relative margins. We test the model empirically using the credit default swap--bond bases and other deviations from the Law of One Price, and use it to evaluate central banks' lending facilities. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: firstname.lastname@example.org., Oxford University Press.
Volume (Year): 24 (2011)
Issue (Month): 6 ()
|Contact details of provider:|| Postal: |
Web page: http://www.rfs.oupjournals.org/Email:
More information through EDIRC
|Order Information:||Web: http://www4.oup.co.uk/revfin/subinfo/|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Daniele Coen-Pirani, 2000.
"Margin Requirements and Equilibrium Asset Prices,"
GSIA Working Papers
2001-E5, Carnegie Mellon University, Tepper School of Business.
When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:24:y:2011:i:6:p:1980-2022. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.