Bubbles or Convenience Yields? A Theoretical Explanation with Evidence from Technology Company Equity Carve-Outs

This paper offers an alternative explanation for what is typically referred to as an asset pricing bubble. We develop a model that formalizes the Cochrane (2002) convenience yield theory of technology company stocks to explain why a rational agent would buy an “overpriced” security. Agents have a desire to trade but short-sale restrictions and other frictions limit their trading strategies and enable prices of two similar securities to be different. Thus, divergent prices for similar securities can be sustained in a rational expectations equilibrium. The paper also provides empirical support for the model using a sample of 1996 - 2000 equity carve-outs.


Issue Date:
2006
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/127045
Total Pages:
59
JEL Codes:
G10; G12; D50
Series Statement:
WP
2006-11




 Record created 2017-04-01, last modified 2017-08-26

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