Safe Asset Carry Trade
Benedikt Ballensiefen () and
Angelo Ranaldo ()
No 1909, Working Papers on Finance from University of St. Gallen, School of Finance
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 (search for similar items in EconPapers)
JEL-codes: E40 E41 G00 G01 G10 G11 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2019-07, Revised 2019-10
New Economics Papers: this item is included in nep-fmk and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2019:09
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