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




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    • Dimitri Vayanos is from the London School of Economics, CEPR and NBER. Pierre-Olivier Weill is from the University of California, Los Angeles. We thank an anonymous referee, Tobias Adrian, Yakov Amihud, Hal Cole, Darrell Duffie, Bernard Dumas, Humberto Ennis, Mike Fleming, Nicolae Gârleanu, Ed Green, Josi Hasbrouck, Terry Hendershott. Jeremy Gravelline, Narayana Kocherlakota, Anna Pavlova, Lasse Pedersen, Malt Richardson, Bill Silber, Rob Stambaugh, Stijn Van Nieuwerburgh, Neil Wallace, Robert Whitelaw, Randy Wright; seminar participants at the Federal Reserve Bank of Minneapolis, Federal Reserve Bank of New York. Federal Reserve Bank of Richmond, HEC Paris, London School of Economics, McGill University, New York University, Oxford University, Paris School of Economics, Pennsylvania State University, Tulane University, University of California Los Angeles (Anderson and Department of Economics), University of Mannheim, University of Piraeus, University of Southern California, Unversity of Vienna, Pennsylvania State University; and participants at the American Finance Association 2005, Caesarea Center Annual Conference 2005, Federal Reserve Bank of Cleveland Summer Workshops in Money, Banking and Payments 2005. NBER Asset Pricing 2005, and Society for Economic Dynamics 2005 conference for helpful comments. We are especially grateful to Mark Fisher, Kenneth Garbade, Tain Hsia-Schneider and Frank Keane for explaining to us many aspects of Treasury markets.


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.