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Price Formation of Pledgeable Securities

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  • A. Pinna

Abstract

I derive the equilibrium price function of securities that can be pledged as collateral, in an economy where rational investors receive heterogeneous information. Although the distribution of borrowers' and lenders' payoffs is truncated, the linear equilibrium price is in closed form. That allows to investigate the impact of pledgeability on informational efficiency. The margin premium depends on the price of liquidity and yields a "pledgeability bias", which increases the conditional volatility of the price function. The impact of pledgeability on prices contributes to explain excessive comovement and seemingly violations of the law of one price.

Suggested Citation

  • A. Pinna, 2015. "Price Formation of Pledgeable Securities," Working Paper CRENoS 201511, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:201511
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    More about this item

    Keywords

    REE; collateral; Analytic solution; Price informativeness;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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