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Bubbles or Convenience Yields? A Theoretical Explanation with Evidence from Technology Company Equity Carve-Outs

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  • Bogan, Vicki

Abstract

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.

Suggested Citation

  • Bogan, Vicki, 2006. "Bubbles or Convenience Yields? A Theoretical Explanation with Evidence from Technology Company Equity Carve-Outs," Working Papers 127045, Cornell University, Department of Applied Economics and Management.
    • Handle: RePEc:ags:cudawp:127045
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    File URL: http://ageconsearch.umn.edu/record/127045/files/Cornell_Dyson_wp0611.pdf
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    References listed on IDEAS

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    1. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
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