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Session Overview
APE 13: Bond convenience yield
Friday, 27/Aug/2021:
5:30pm - 7:00pm

Session Chair: Kathy Yuan, London School of Economics and Political Science
Location: Stream 01

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ID: 681

Bond Convenience Yields in the Eurozone Currency Union

Zhengyang Jiang4, Hanno Lustig2, Stijn Van Nieuwerburgh1, Mindy Xiaolan3

1Columbia University Graduate School of Business, United States of America; 2Stanford University Graduate School of Business; 3University of Texas at Austin McCombs School; 4Northwestern University Kellogg School of Management

Discussant: Quentin Vandeweyer (University of Chicago: Booth)

We develop a theoretical framework to study bond convenience yields in a currency union. The intertemporal government budget condition requires bond convenience yields to adjust in response to shocks to government surpluses. Empirically, we find convenience yields explain a larger fraction of the variation in Eurozone bond yields than default spreads, and higher convenience yields are correlated with stronger fiscal conditions both in the cross-section and in the time series. Our estimates suggest the convenience yields impose large fiscal costs on the peripheral countries. If all Euro- zone countries could have issued sovereign bonds at the same convenience yields as Germany, they would have raised an extra 350 billion Euros in cumulative revenues from bond issuance between 2003 and 2019, representing 3% of 2019 Eurozone GDP.

681-APE-EFA2021-Bond Convenience Yields in the Eurozone Currency Union.pdf

ID: 334

Safe Asset Carry Trade

Benedikt Ballensiefen1,3, Angelo Ranaldo1,2

1University of St.Gallen; 2Swiss Finance Institute; 3World Bank Group

Discussant: Karamfil Todorov (Bank for International Settlements)

We provide the first systematic asset pricing analysis of one of the main safe asset categories, the repurchase agreement (repo). A standard factor model with a market and a carry factor prices these near-money assets. While the market factor determines the short-term interest rate level, the carry factor accounts for their cross-sectional dispersion. Consistent with the safe asset literature, the carry factor depicts heterogeneity in convenience yield and increases in safety premium and liquidity premium reflecting asset scarcity and opportunity cost. Our carry factor helps explain the cross-section of long-term bond returns after accounting for standard bond pricing factors.

334-APE-EFA2021-Safe Asset Carry Trade.pdf

ID: 1088

The term structure of CIP violations

Patrick Augustin1, Mikhail Chernov2, Lukas Schmid3, Dongho Song4

1Desautels Faculty of Management, McGill University, Canada; 2Anderson School of Management, UCLA; NBER; CEPR, USA; 3Marshall School of Business, USC; CEPR, USA; 4Carey Business School, Johns Hopkins University, USA

Discussant: Ran Shi (London School of Economics)

We show theoretically that persistent deviations from covered interest parity (CIP) across multiple horizons imply simultaneous arbitrage opportunities only if uncollateralized interbank lending rates are riskless. In the absence of observable riskless discount rates, we extract them empirically from interest rate swaps using a simple no-arbitrage framework. They deliver novel quantitative benchmarks that reconcile a zero cross-currency basis with non-zero cross-currency basis swap rates. We quantify that the no-arbitrage benchmark accounts for about two thirds of the alleged CIP deviations. The residual pricing errors are associated with intermediary constraints.

1088-APE-EFA2021-The term structure of CIP violations.pdf

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