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A Search-Based Theory of the On-the-Run Phenomenon

  • Pierre-Olivier Weill
  • Dimitri Vayanos


    (Finance New York University)

We propose a model in which assets with identical cash flows can trade at different prices. Infinitely lived agents can establish long positions in a search spot market, or short positions by first borrowing an asset in a search repo market. We show that short-sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed. That asset enjoys greater liquidity, a higher lending fee ("specialness"), and trades at a premium consistent with no-arbitrage. We derive closed-form solutions for small frictions, and provide a calibration generating realistic on-the-run premia. Copyright (c) 2008 by The American Finance Association.

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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 701.

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Date of creation: 2005
Date of revision:
Handle: RePEc:red:sed005:701
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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