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Safe Assets

Paper Session

Friday, Jan. 7, 2022 3:45 PM - 5:45 PM (EST)

Hosted By: American Finance Association
  • Chair: Christine A. Parlour, University of California-Berkeley

Safe Asset Carry Trade

Benedikt Ballensiefen
,
University of St. Gallen and World Bank Group
Angelo Ranaldo
,
University of St. Gallen

Abstract

We provide the first systematic asset pricing analysis of one of the main safe asset categories, the repurchase agreement (repo). Based on the temporal and cross-sectional variation in short-term rates, we form a carry that, together with a market factor, prices these near-money assets in a linear pricing model. The carry depicts heterogeneity in non-pecuniary convenience yield of collateral assets and increases in safety premium and liquidity premium reflecting asset scarcity and opportunity cost. Our carry helps explain the cross-section of short-term rates as well as of long-term bond returns after accounting for standard bond pricing factors.

The Price of Money: How Collateral Policy Affects the Yield Curve

Kjell Nyborg
,
University of Zurich
Jiri Woschitz
,
University of Zurich

Abstract

Central bank collateral policy regulates the terms of exchange between central-bank money, provided directly by the central bank, and collateral, provided by eligible counterparties. Focusing on haircuts in central-bank repos, we show that collateral policy has significant impact on the yield curve. We develop clean identification of variation in central-bank haircuts by exploiting differential collateral-policy treatment of same-country government bonds in the euro area. Combining difference-in-differences analysis around four separate events with yield-curve modeling, we show that an increase in haircuts lifts the yield curve, but heterogeneously so over the maturity spectrum. Our findings imply that central-bank money is priced in the market and that central banks can move and shape the yield curve through collateral policy.

The Safety Premium of Safe Assets

Jens Christensen
,
Federal Reserve Bank of San Francisco
Nikola Mirkov
,
Swiss National Bank

Abstract

Safe assets usually trade at a premium due to their high credit quality and deep liquidity. To understand the role of credit quality for such premia, we focus on Swiss Confederation bonds, which are extremely safe but not particularly liquid. We therefore refer to their premia as safety premia and quantify them using an arbitrage-free term structure model that accounts for time-varying premia in individual bond prices. The estimation results show that Swiss safety premia are large and exhibit long-lasting trends. Furthermore, our regression analysis suggests that they shifted upwards persistently following the launch of the euro but have been depressed in recent years by the asset purchases of the European Central Bank.

Discussant(s)
Jack Bao
,
University of Delaware
Carolin Pflueger
,
University of Chicago
Chase Ross
,
Yale University
JEL Classifications
  • G1 - Asset Markets and Pricing