NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Dimitri Vayanos, Pierre-Olivier Weill

NBER Working Paper No. 12670
Issued in November 2006
NBER Program(s):   AP

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, 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.

download in pdf format
   (530 K)

email paper

This paper is available as PDF (530 K) or via email.

An online appendix is available for this publication.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12670

Published: Dimitri Vayanos & Pierre-Olivier Weill, 2008. "A Search-Based Theory of the On-the-Run Phenomenon," Journal of Finance, American Finance Association, vol. 63(3), pages 1361-1398, 06.

Users who downloaded this paper also downloaded these:
Krishnamurthy, Nagel, and Orlov w17768 Sizing Up Repo
Engle and Lange w6129 Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us