Price Formation of Pledgeable Securities
|Title||Price Formation of Pledgeable Securities|
|Publication Type||Working Paper|
|Year of Publication||2015|
|ISBN Number||978 88 8467 941 3|
|Keywords||Analytic solution, collateral, Price informativeness, REE|
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.