Granular Treasury Demand with Arbitrageurs

88 Pages Posted: 30 Sep 2024 Last revised: 31 Mar 2025

See all articles by Kristy A.E. Jansen

Kristy A.E. Jansen

University of Southern California - Marshall School of Business; De Nederlandsche Bank

Wenhao Li

University of Southern California - Marshall School of Business

Lukas Schmid

University of Southern California - Marshall School of Business

Date Written: September 29, 2024

Abstract

We construct a novel dataset of sector-level U.S. Treasury holdings, covering the majority of the market. Using this dataset, we estimate maturity-specific demand functions and elasticities of different investors and the Fed, and integrate them into a dynamic equilibrium model of the Treasury market with risk-averse arbitrageurs. Quantifying the model reveals that (1) strong arbitrage leads to an elastic Treasury market and a steeply downward-sloping term structure of market elasticity; (2) monetary tightening raises term premia due to arbitrageurs interacting with investors exhibiting high cross-elasticities; (3) QE has limited impact unless the Fed credibly commits to sustained balance sheet expansion.

Keywords: Treasury demand, financial intermediaries, arbitrage, monetary policy, quantitative easing

JEL Classification: E4, G1, G2

Suggested Citation

Jansen, Kristy A.E. and Li, Wenhao and Schmid, Lukas, Granular Treasury Demand with Arbitrageurs (September 29, 2024). USC Marshall School of Business Research Paper Sponsored by iORB, Available at SSRN: https://ssrn.com/abstract=4940397 or http://dx.doi.org/10.2139/ssrn.4940397

Kristy A.E. Jansen

University of Southern California - Marshall School of Business ( email )

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Wenhao Li (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

HOME PAGE: http://www.wenhao-li.com

Lukas Schmid

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

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