The Liquidity Premium of Safe Assets: The Role of Government Debt Supply

10 Pages Posted: 1 Jun 2017 Last revised: 4 May 2018

See all articles by Qizhou Xiong

Qizhou Xiong

Said Business School, University of Oxford

Date Written: April 26, 2018

Abstract

This paper studies the impact of government debt supply on the liquidity premium, as measured by the yield spread between public and private safe assets. I test, at a quarterly frequency, how the liquidity premium of Treasury bills against i) Aaa-rated corporate bonds and ii) commercial paper responds to government debt supply changes. The response is significant in each case – even after controlling for the opportunity cost of money – but heterogeneous: negative for Aaa-rated corporate bonds and positive for commercial paper. This points to different degrees of substitutability with government debt across apparently similar private safe assets.

Keywords: Government Debt, Liquidity Premium, Safe Assets

JEL Classification: E43, G12, E41

Suggested Citation

Xiong, Qizhou, The Liquidity Premium of Safe Assets: The Role of Government Debt Supply (April 26, 2018). Available at SSRN: https://ssrn.com/abstract=2977458 or http://dx.doi.org/10.2139/ssrn.2977458

Qizhou Xiong (Contact Author)

Said Business School, University of Oxford ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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