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A look at the relevance of price pressure in the bond market view using the UK pension reform of 2004 and the US program buyback of 2000 to 2001. The long-term interest rates experienced large and long lasting shifts due to regulation-induced change in the demand of a long maturity clientele in the UK and government-induced changed in the supply of long-term bonds in the US.

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1467-937X.2009.00582.x Byline: MATTHEW RABIN (1), DIMITRI VAYANOS (2) Abstract: We develop a model of the gambler's fallacy-the mistaken belief that random sequences should exhibit systematic reversals. We show that an individual who holds this belief and observes a sequence of signals can exaggerate the magnitude of changes in an underlying state but underestimate their duration. When the state is constant, and so signals are i.i.d., the individual can predict that long streaks of similar signals will continue-a hot-hand fallacy. When signals are serially correlated, the individual typically under-reacts to short streaks, over-reacts to longer ones, and under-reacts to very long ones. Our model has implications for a number of puzzles in finance, e.g. the active-fund and fund-flow puzzles, and the presence of momentum and reversal in asset returns. Author Affiliation: (1)University of California, Berkeley (2)London School of Economics, CEPR and NBER Article History: First version received September 2007; final version accepted May 2009 (Eds.)

To purchase or authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1540-6261.2008.01360.x Byline: DIMITRI VAYANOS, PIERRE-OLIVIER WEILL (*) Abstract: ABSTRACT 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. Article note: (*) 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 Garleanu, 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.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jet.2006.08.001 Byline: Dimitri Vayanos (a), Tan Wang (b) Abstract: We develop a search-based model of asset trading, in which investors of different horizons can invest in two assets with identical payoffs. The asset markets are partially segmented: buyers can search for only one asset, but can decide which one. We show the existence of a 'clientele'' equilibrium where all short-horizon investors search for the same asset. This asset has more buyers and sellers, lower search times, and trades at a higher price relative to its identical-payoff counterpart. The clientele equilibrium dominates the one where all investor types split equally across assets, implying that the concentration of liquidity is socially desirable. Author Affiliation: (a) London School of Economics, CEPR and NBER, UK (b) Sauder School of Business, University of British Columbia, CCFR, Canada Article History: Received 13 April 2005; Revised 7 August 2006

A model of opinion formation is used to discover marketing and political science implications.

We propose a model of organizational decision making, in which information processing is decentralized. Our model incorporates two features of many actual organizations: aggregation entails a loss of useful information, and the decision problems of different agents interact. We assume that an organization forms a portfolio of risky assets, following a hierarchical procedure. Agents' decision roles and the organization's hierarchical structure are derived endogenously. Typically, in the optimal hierarchical structure, all agents have one subordinate, and returns to ability are at least as high at the bottom as at the top. However, these results can be reversed in the presence of returns to specialization.

A model is developed wherein the discrepancies between the prices of two identical risky assets is exploited by competitive arbitrageurs. The conditions under which they take the risk are characterized.

This article examines the decisions of strategic traders in a noisy financial market when they hold an endowment of stock. Results show that after receiving the endowment the trader reduces risk exposure by selling at decreased rates and then buying back shares.

This paper studies a dynamic model of a financial market with N strategic agents. Agents receive random stock endowments at each period and trade to share dividend risk. Endowments are the only private information in the model. We find that agents trade slowly even when the time between trades goes to 0. In fact, welfare loss due to strategic behaviour increases as the time between trades decreases. In the limit when the time between trades goes to 0, welfare loss is of order I/N, and not 1/[N.sup.2] as in the static models of the double auctions literature. The model is very tractable and closed-form solutions are obtained in a special case.