Asset Safety and Liquidity over the Business Cycle
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Date
2024-08-29
Publication Type
Conference Paper
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yes
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Abstract
We decompose the convenience yield of U.S. Treasury bonds into safety and liquidity premia and document a positive relationship of these components with unemployment over the business cycle. This counter-cyclical pattern persists after controlling for monetary policy, the supply of treasuries and uncertainty. In addition, we find that the safety premium is much more volatile than the liquidity premium, especially during recessions. To rationalize these findings, we propose a real business cycle model with labor search frictions, private and public liquid assets and corporate default. We carefully calibrate the model to the U.S. economy and show that it generates endogenous fluctuations in the safety and liquidity premia of U.S. Treasury bonds that are consistent with the data
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published
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Publisher
European Economic Association
Event
39th Meeting of the European Economic Association and the 76th European Meeting of the Econometric Society (EEA-ESEM 2024)
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Subject
Treasury bonds; Corporate bonds; Convenience yield; Safety premium; Liquidity premium; Business cycle
Organisational unit
02525 - KOF Konjunkturforschungsstelle / KOF Swiss Economic Institute
06338 - KOF FB KOF Lab / KOF FB KOF Lab
03729 - Gersbach, Hans / Gersbach, Hans
Notes
Conference lecture held on August 29, 2024.