Asset Mispricing / Kurt F. Lewis, Francis A. Longstaff, Lubomir Petrasek.

Format:

Book

Author/Creator:

Lewis, Kurt F.

Contributor:

National Bureau of Economic Research.

Longstaff, Francis A.

Petrasek, Lubomir.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23231.

NBER working paper series no. w23231

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

We use a unique dataset of corporate bonds guaranteed by the full faith and credit of the U.S. to test a number of recent theories about why asset prices may diverge from fundamental values. These models emphasize the role of funding liquidity, slow-moving capital, the leverage of financial intermediaries, and other frictions in allowing mispricing to occur. Consistent with theory, we find there are strong patterns of commonality in mispricing and that changes in dealer haircuts and funding costs are significant drivers of mispricing. Furthermore, mispricing can trigger short-term margin and funding-cost spirals. Using detailed bond and dealer-level data, we find that most of the cross-sectional variation in mispricing is explained by differences in dealer funding costs, inventory positions, and trading liquidity measures. These results provide strong empirical support for a number of current theoretical models.

Notes:

Print version record

March 2017.