← Search

Journal of Finance Vol. 63 No. 3 2008

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

Dimitri Vayanos; Pierre-Olivier Weill1,2,3,4

1 Reserve Bank of India · 2 Federal Reserve Bank of Minneapolis · 3 Federal Reserve Bank of Richmond · 4 Federal Reserve Bank of New York

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.

DOI
10.1111/j.1540-6261.2008.01360.x
Volume
63
Issue
3
Pages
1361-1398
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite