Safe Asset Carry Trade
63 Pages Posted: 25 Jul 2019
Date Written: July 18, 2019
We provide an asset pricing analysis of one of the main categories of near-money or safe assets, the repurchase agreement (repo). Heterogeneity in repo rates allows for a remunerative carry trade. The return on this carry trade, our carry factor, together with a market factor explain the temporal and cross-sectional variation in repo rates within a no-arbitrage framework: While the market factor determines the level of short-term interest rates, the carry factor accounts for the cross-sectional dispersion. Consistent with the safe asset literature, the carry factor reflects heterogeneity in convenience premia and is explained by the safety premium, the liquidity premium, and the opportunity cost of holding money.
Keywords: Safe Asset, Near-Money Asset, Repo, Carry Trade, Asset Pricing, Short-term Interest Rates, Convenience Premium
JEL Classification: E40, E41, G00, G01, G10, G11
Suggested Citation: Suggested Citation