Asset Mispricing

Working Paper No. 23231 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 levera...

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Bibliographic Details
Published in:NBER Working Paper Series 2017-03, p.23231
Main Authors: Lewis, Kurt F, Longstaff, Francis A, Petrasek, Lubomir
Format: Article
Language:English
Subjects:
Assets
Bond markets
Corporate bonds
Costs
Datasets
Economic theory
Funding
Inventory
Liquidity
Pricing policies
Studies
Treasury bonds
Working papers
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Summary:Working Paper No. 23231 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.
ISSN:0898-2937
DOI:10.3386/w23231