Money Talks: Transaction Costs, the Value of Convenience, and the Cross-Section of Safe Asset Returns

Ragnar Juelsrud, Plamen Nenov, Fabienne Schneider and Olav Syrstad

Staff Working Papers from Bank of Canada

Abstract: In this paper we study the cross-section of equilibrium returns on safe assets using a tractable asset pricing model with a micro-founded demand for liquidity and multiple safe assets with heterogeneous transaction costs. A key feature of our model is the “value of convenience,” which is an equilibrium object that measures the level of liquidity risk-sharing in the economy. Changes in asset supply or the transaction cost of a single safe asset affect aggregate liquidity and the returns of all assets. The model features a pecuniary externality, which investors fail to internalize when forming their portfolios and which impacts equilibrium welfare. Therefore, policies that increase the payoff on the most liquid asset improve welfare in the competitive equilibrium. We test the main predictions of our theory using a novel measure of relative (in)convenience yields in the US Treasury market.

Keywords: Asset pricing; Financial markets; Debt management; Monetary policy (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2025-11
New Economics Papers: this item is included in nep-fdg, nep-fmk and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:25-34

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