Financial asset demand is elastic: Evidence from new issues of Federal Home Loan Bank debt

Vladimir Atanasov and John Merrick

Journal of Banking & Finance, 2011, vol. 35, issue 12, 3225-3239

Abstract: We estimate the slope of the demand curve for newly auctioned FHLB discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity. Our unique dataset of roughly 2900 observations of two price-quantity pairs—the first from a pre-auction dealer survey, the second from actual auction results—provides the quantity shift necessary to identify demand. In contrast to previous findings of downward-sloping demand curves for equities, we show that demand for newly issued FHLB notes is nearly perfectly elastic during normal market conditions. We find, however, that frictions like arbitrage risk and, to a lesser extent, heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50% drop in elasticity observed during the recent financial crisis.

Keywords: Debt; Demand elasticity; Arbitrage risk; Federal Home Loan Bank (search for similar items in EconPapers)
JEL-codes: D44 G21 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:12:p:3225-3239

DOI: 10.1016/j.jbankfin.2011.05.005

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