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Price Formation of Pledgeable Securities

Listed author(s):
  • A. Pinna

    ()

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.

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File URL: http://crenos.unica.it/crenos/node/6534
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File URL: http://crenos.unica.it/crenos/sites/default/files/WP15-11.pdf
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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201511.

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Date of creation: 2015
Handle: RePEc:cns:cnscwp:201511
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