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Portfolio Choice and Settlement Frictions: A Theory of Endogenous Convenience Yields / Javier Bianchi, Saki Bigio.
- Format:
- Book
- Author/Creator:
- Bianchi, Javier.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w34474.
- NBER working paper series no. w34474
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2025.
- Summary:
- We study settlement frictions that arise from the need to finance negative balances through an over-the-counter (OTC) market. We derive a closed-form expression for the endogenous convenience yield and show how it can be incorporated into a canonical portfolio problem. Using this framework, we examine how shifts in settlement frictions affect liquidity premia, the volume of overnight funding, the dispersion of market rates, and optimal portfolio allocations. From a normative perspective, we show that in the competitive equilibrium, investors may either over- or under-invest in liquid assets; moreover, both higher risk aversion and tighter aggregate liquidity increase the likelihood of under-accumulation.
- Notes:
- November 2025.
- Print version record
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