Price Formation of Pledgeable Securities

TitlePrice Formation of Pledgeable Securities
Publication TypeWorking Paper
Year of Publication2015
AuthorsA. Pinna
Number2015_11
ISBN Number978 88 8467 941 3
KeywordsAnalytic solution, collateral, Price informativeness, REE
Abstract

I derive the equilibrium price function of securities that can be pledged as collateral, in an economy where rational investors receive heterogeneous information. Although the distribution of borrowers’ and lenders’ payoffs is truncated, the linear equilibrium price is in closed form. That allows to investigate the impact of pledgeability on informational efficiency. The margin premium depends on the price of liquidity and yields a "pledgeability bias", which increases the conditional volatility of the price function. The impact of pledgeability on prices contributes to explain excessive comovement and seemingly violations of the law of one price.

Citation Key6534
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