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Margin-based Asset Pricing and Deviations from the Law of One Price
2011
The Review of financial studies
In a model with multiple agents with different risk aversions facing margin constraints, we show how securities' required returns are characterized both by their beta and their margins. Negative shocks to fundamentals make margin constraints bind, lowering risk free rates and raising Sharpe ratios of risky securities, especially for high-margin securities. Such a funding liquidity crisis gives rise to a "basis," that is, a price gap between securities with identical cash-flows but different
doi:10.1093/rfs/hhr027
fatcat:lnyzjyyaurdg7a7lgqmany5fg4