Safe Asset Carry Trade
64 Pages Posted: 25 Jul 2019 Last revised: 17 Jun 2021
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). A standard factor model with a market and a carry factor prices these near-money assets. While the market factor determines the short-term interest rate level, the carry factor accounts for their cross-sectional dispersion. Consistent with the safe asset literature, the carry factor depicts heterogeneity in convenience yield and increases in safety premium and liquidity premium reflecting asset scarcity and opportunity cost. Our carry factor helps explain the cross-section 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