TY  - JOUR
AU  - Vayanos,Dimitri
AU  - Weill,Pierre-Olivier
TI  - A Search-Based Theory of the On-the-Run Phenomenon
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12670
PY  - 2006
Y2  - November 2006
UR  - http://www.nber.org/papers/w12670
L1  - http://www.nber.org/papers/w12670.pdf
N1  - Author contact info:
Dimitri Vayanos
Department of Finance, A350
London School of Economics
Houghton Street
London WC2A 2AE
UNITED KINGDOM
Tel: +44 (0)20 7955 6382
Fax: +44 (0)20 7955 7420
E-Mail: d.vayanos@lse.ac.uk

Pierre-Olivier Weill
Department of Economics
University of California, Los Angeles
Bunche Hall 8283
Los Angeles, CA 90095
Tel: 310/794-6495
Fax: 310/825-9528
E-Mail: poweill@econ.ucla.edu
M3  - presented at "SI 2005 Asset Pricing workshop", July 14-15, 2005
AB  - 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.
ER  -