Download this Paper Open PDF in Browser

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

71 Pages Posted: 11 Mar 2005  

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: October 30, 2006

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, 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.

Keywords: On-the-run bonds, liquidity, specialness, search, arbitrage

JEL Classification: G1, D8

Suggested Citation

Weill, Pierre-Olivier and Vayanos, Dimitri, A Search-Based Theory of the On-the-Run Phenomenon (October 30, 2006). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=669821 or http://dx.doi.org/10.2139/ssrn.669821

Pierre-Olivier Weill

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dimitri Vayanos (Contact Author)

London School of Economics ( email )

A350
Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)

Center for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
175
Rank
104,159
Abstract Views
1,839