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

Author

Listed:
  • Pierre-Olivier Weill
  • Dimitri Vayanos

    () (Finance New York University)

Abstract

We propose a model in which assets with identical cash flows can trade at different prices. Agents enter into an infinite-horizon, steady-state market to establish long or short positions. Both the spot and the asset-lending market operate through search. Short-sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed. As a result, that asset enjoys both greater liquidity, measured by search times, and a higher lending fee ("specialness"). Liquidity and specialness translate into price premia that are consistent with no-arbitrage. We derive closed-form solutions for small frictions, and can generate price differentials in line with observed on-the-run premia.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Pierre-Olivier Weill & Dimitri Vayanos, 2005. "A Search-Based Theory of the On-the-Run Phenomenon," 2005 Meeting Papers 701, Society for Economic Dynamics.
  • Handle: RePEc:red:sed005:701
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    References listed on IDEAS

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    More about this item

    Keywords

    Treasury Market; Liquidity; Search;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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