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

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Author Info
DIMITRI VAYANOS
PIERRE-OLIVIER WEILL

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Abstract

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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2008.01360.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 63 (2008)
Issue (Month): 3 (06)
Pages: 1361-1398
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Handle: RePEc:bla:jfinan:v:63:y:2008:i:3:p:1361-1398

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Michael J. Fleming, 2002. "Are larger Treasury issues more liquid? Evidence from bill reopenings," Proceedings, Federal Reserve Bank of Cleveland, pages 707-739.
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  2. Amihud, Yakov & Mendelson, Haim, 1991. " Liquidity, Maturity, and the Yields on U.S. Treasury Securities," Journal of Finance, American Finance Association, vol. 46(4), pages 1411-25, September. [Downloadable!] (restricted)
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  1. Ricardo Lagos & Guillaume Rocheteau, 2006. "Search in asset markets," Staff Report 375, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  2. Gara M. Afonso, 2008. "Liquidity and congestion," Staff Reports 349, Federal Reserve Bank of New York. [Downloadable!]
  3. Ricardo Lagos & Guillaume Rocheteau, 2008. "Liquidity in asset markets with search frictions," Staff Report 408, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  4. Shoko Morimoto, 2009. "Asset markets can achieve efficiency in the directed search framework," Discussion Papers in Economics and Business 09-33, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP). [Downloadable!]
  5. Kajuth, Florian & Watzka, Sebastian, 2008. "Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia," Discussion Papers in Economics 4858, University of Munich, Department of Economics. [Downloadable!]
  6. Ricardo Lagos & Guillaume Rocheteau & Pierre-Olivier Weill, 2009. "Crises and Liquidity in Over-the-Counter Markets," NBER Working Papers 15414, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Bruce Mizrach & Christopher J. Neely, 2007. "Information shares in the U.S. treasury market," Working Papers 2005-070, Federal Reserve Bank of St. Louis. [Downloadable!]
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  8. Ricardo Lagos & Guillaume Rocheteau & Pierre-Olivier Weill, 2008. "Crashes and Recoveries in Illiquid Markets," NBER Working Papers 14119, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Biais, Bruno & Weill, Pierre-Olivier, 2009. "Liquidity Shocks and Order Book Dynamics," IDEI Working Papers 550, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  10. Bruce Mizrach & Christopher J. Neely, 2007. "The microstructure of the U.S. treasury market," Working Papers 2007-052, Federal Reserve Bank of St. Louis. [Downloadable!]
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