TY  - JOUR
AU  - Gârleanu,Nicolae
AU  - Pedersen,Lasse Heje
TI  - Margin-Based Asset Pricing and Deviations from the Law of One Price
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16777
PY  - 2011
Y2  - February 2011
UR  - http://www.nber.org/papers/w16777
L1  - http://www.nber.org/papers/w16777.pdf
N1  - Author contact info:
Nicolae B. Garleanu
Haas School of Business
F628
University of California, Berkeley
Berkeley, CA 94720
Tel: (1) 510 642 3421
Fax: (1) 510 643 1420
E-Mail: garleanu@haas.berkeley.edu

Lasse H. Pedersen
NYU Stern Finance
44 West Fourth Street
Suite 9-190
New York, NY 10012
Tel: 212/998-0359
Fax: 212/995-4233
E-Mail: lpederse@stern.nyu.edu
AB  - In a model with heterogeneous-risk-aversion agents facing margin constraints, we show how securities' required returns are characterized both by their betas and their margin requirements. Negative shocks to fundamentals make margin constraints bind, lowering risk-free rates and raising Sharpe ratios of risky securities, especially for high-margin securities. Such a funding-liquidity crisis gives rise to "bases," that is, price gaps between securities with identical cash-flows but different margins. In the time series, bases depend on the shadow cost of capital, which can be captured through the interest-rate spread between collateralized and uncollateralized loans, and, in the cross section, they depend on relative margins. We test the model empirically using the CDS-bond bases and other deviations from the Law of One Price, and use it to evaluate central banks' lending facilities.
ER  -