Safe Asset Carry Trade

63 Pages Posted: 25 Jul 2019

See all articles by Benedikt Ballensiefen

Benedikt Ballensiefen

University of St. Gallen - School of Finance

Angelo Ranaldo

University of St. Gallen; University of St. Gallen - School of Finance

Date Written: July 18, 2019

Abstract

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

Ballensiefen, Benedikt and Ranaldo, Angelo, Safe Asset Carry Trade (July 18, 2019). University of St.Gallen, School of Finance Research Paper No. 2019/09. Available at SSRN: https://ssrn.com/abstract=3425892 or http://dx.doi.org/10.2139/ssrn.3425892

Benedikt Ballensiefen

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Angelo Ranaldo (Contact Author)

University of St. Gallen ( email )

Swiss Institute of Banking and Finance s/bf-HSG
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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