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Abstract
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.