Safe Asset Carry Trade
Review of Asset Pricing Studies (forthcoming)
55 Pages Posted: 25 Jul 2019 Last revised: 15 Jul 2022
Date Written: July 18, 2019
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 yields of collateral assets and increases in the safety premium and the liquidity premium reflecting 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.
Keywords: Safe Asset, Repo, Asset Pricing, Convenience Premium, Bond Pricing.
JEL Classification: E40, E41, G00, G01, G10, G11
Suggested Citation: Suggested Citation