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Journal of Financial Economics Vol. 141 No. 3 2021

Asset mispricing

Kurt F. Lewis1; Francis A. Longstaff2,3; Lubomir Petrasek1

1 Federal Reserve Board of Governors · 2 National Bureau of Economic Research · 3 University of California, Los Angeles

Abstract

We use a unique sample of corporate bonds guaranteed by the full faith and credit of the US to test recent theories about why asset prices may diverge from fundamental values. A key feature of our study is access to proprietary data on the haircuts, funding costs, and inventory positions of the primary dealers making markets in the individual bonds. The results provide strong support for the cross-sectional implications of the safe-asset, intermediary-constraints, and search-frictions literatures. Furthermore, the results indicate that network topology may also play an important role in explaining mispricing.

DOI
10.1016/j.jfineco.2020.05.011
Volume
141
Issue
3
Pages
981-1006
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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