Corporate Asset Pricing

Abstract

I show the new fact that Idiosyncratic volatility significantly predicts the convenience
yield. This fact poses a puzzle with current safe asset theories. I develop a new theory
that reconciles this puzzle - a theory I label Corporate Asset Pricing (CAP). CAP
explains 29% of future convenience yield variation and is verified in the cross-section
of firm treasury holdings. I show theoretically that when managers are exposed to
moral hazard, corporate demand will be determined by their idiosyncratic risk. I isolate
my demand-based effect from confounders by using exogenous cross-sectional
variation from corporate size and industry exposures. The results provide support
for the importance of corporates as an investor class.

Keywords: Safe Asset Demand, Convenience Yield, Idiosyncratic Volatility, Investment

JEL Classification: G11, G12, G31, G32