IDEAS home Printed from https://ideas.repec.org/p/red/sed005/701.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: https://www.red-files-public.s3.amazonaws.com/meetpapers/2005/paper_701.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, vol. 140(1), pages 66-96, May.
    2. Fleming, Michael J, 2002. "Are Larger Treasury Issues More Liquid? Evidence from Bill Reopenings," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 707-735, August.
    3. Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2004. "Asset Prices and Trading Volume under Fixed Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 1054-1090, October.
    4. Rao Aiyagari, S. & Wallace, Neil & Wright, Randall, 1996. "Coexistence of money and interest-bearing securities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 397-419, June.
    5. Jean-Luc Vila & Dimitri Vayanos, 1999. "Equilibrium interest rate and liquidity premium with transaction costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(3), pages 509-539.
    6. Jordan, Bradford D & Jordan, Susan D, 1997. "Special Repo Rates: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 52(5), pages 2051-2072, December.
    7. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    8. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    9. Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," The Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 1-58.
    10. Michael J. Barclay & Terrence Hendershott & Kenneth Kotz, 2006. "Automation versus Intermediation: Evidence from Treasuries Going Off the Run," Journal of Finance, American Finance Association, vol. 61(5), pages 2395-2414, October.
    11. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
    12. George M. Constantinides, 2005. "Capital Market Equilibrium with Transaction Costs," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 7, pages 207-227, World Scientific Publishing Co. Pte. Ltd..
    13. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    14. Vayanos, Dimitri & Wang, Tan, 2007. "Search and endogenous concentration of liquidity in asset markets," Journal of Economic Theory, Elsevier, vol. 136(1), pages 66-104, September.
    15. Burdett, Kenneth & O'hara, Maureen, 1987. "Building blocks : An introduction to block trading," Journal of Banking & Finance, Elsevier, vol. 11(2), pages 193-212, June.
    16. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-487, June.
    17. Wallace, Neil, 2000. "A model of the liquidity structure based on asset indivisibility," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 55-68, February.
    18. Buraschi, Andrea & Menini, Davide, 2002. "Liquidity risk and specialness," Journal of Financial Economics, Elsevier, vol. 64(2), pages 243-284, May.
    19. Huang, Ming, 2003. "Liquidity shocks and equilibrium liquidity premia," Journal of Economic Theory, Elsevier, vol. 109(1), pages 104-129, March.
    20. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    21. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
    22. Duffie, Darrell, 1996. "Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
    23. Warga, Arthur, 1992. "Bond Returns, Liquidity, and Missing Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(4), pages 605-617, December.
    24. Krishnamurthy, Arvind, 2002. "The bond/old-bond spread," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 463-506.
    25. Chowdhry, Bhagwan & Nanda, Vikram, 1991. "Multimarket Trading and Market Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 483-511.
    26. Mark Fisher, 2002. "Special repo rates: an introduction," Economic Review, Federal Reserve Bank of Atlanta, vol. 87(Q2), pages 27-43.
    27. 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 1411-1425, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    2. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity -- Theory and Empirical Evidence," NBER Working Papers 18251, National Bureau of Economic Research, Inc.
    3. Vayanos, Dimitri & Wang, Tan, 2007. "Search and endogenous concentration of liquidity in asset markets," Journal of Economic Theory, Elsevier, vol. 136(1), pages 66-104, September.
    4. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, vol. 140(1), pages 66-96, May.
    5. Vayanos, Dimitri & Wang, Jiang, 2009. "Liquidity and asset prices: a united framework," LSE Research Online Documents on Economics 29303, London School of Economics and Political Science, LSE Library.
    6. Huang, Ming, 2003. "Liquidity shocks and equilibrium liquidity premia," Journal of Economic Theory, Elsevier, vol. 109(1), pages 104-129, March.
    7. Stefania D'Amico & Roger Fan & Yuriy Kitsul, 2013. "The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors," Working Paper Series WP-2013-22, Federal Reserve Bank of Chicago.
    8. Albuquerque, Rui & Song, Shiyun & Yao, Chen, 2017. "The Price Effects of Liquidity Shocks: A Study of SEC’s Tick-Size Experiment," CEPR Discussion Papers 12486, C.E.P.R. Discussion Papers.
    9. Pereira, João Pedro & Zhang, Harold H., 2010. "Stock Returns and the Volatility of Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(4), pages 1077-1110, August.
    10. Narayan Bulusu & Sermin Gungor, 2018. "Government of Canada Securities in the Cash, Repo and Securities Lending Markets," Discussion Papers 18-4, Bank of Canada.
    11. Dimitri Vayanos, 2004. "Flight to Quality, Flight to Liquidity, and the Pricing of Risk," NBER Working Papers 10327, National Bureau of Economic Research, Inc.
    12. Anton Tsoy, 2016. "Liquidity and Prices in Decentralized Markets with Almost Public Information," 2016 Meeting Papers 8, Society for Economic Dynamics.
    13. Buss, Adrian & Uppal, Raman & Vilkov, Grigory, 2015. "Asset prices in general equilibrium with recursive utility and illiquidity induced by transactions costs," SAFE Working Paper Series 41, Leibniz Institute for Financial Research SAFE, revised 2015.
    14. Albuquerque, Rui & Song, Shiyun & Yao, Chen, 2020. "The price effects of liquidity shocks: A study of the SEC’s tick size experiment," Journal of Financial Economics, Elsevier, vol. 138(3), pages 700-724.
    15. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 261-282, October.
    16. Lagos, Ricardo, 2010. "Asset prices and liquidity in an exchange economy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 913-930, November.
    17. Haoyang Liu & Zhaogang Song & James Vickery, 2021. "Defragmenting Markets: Evidence from Agency MBS," Staff Reports 965, Federal Reserve Bank of New York.
    18. Isaenko, Sergey, 2023. "Transaction costs, frequent trading, and stock prices," Journal of Financial Markets, Elsevier, vol. 64(C).
    19. Nicolae Gârleanu & Lasse Heje Pedersen, 2013. "Dynamic Trading with Predictable Returns and Transaction Costs," Journal of Finance, American Finance Association, vol. 68(6), pages 2309-2340, December.
    20. Lewis, Kurt F. & Longstaff, Francis A. & Petrasek, Lubomir, 2021. "Asset mispricing," Journal of Financial Economics, Elsevier, vol. 141(3), pages 981-1006.

    More about this item

    Keywords

    Treasury Market; Liquidity; Search;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed005:701. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.