Conference Agenda

High asset price volatility alongside low portfolio flows reveals a fundamental trade-off between investor disagreement and price impact: When volatility is high but flows are small, investors must either largely agree with each other or be insensitive to price changes, implying large price impacts of small flows. We formalize this relationship in a price impact bound based on price volatility, flow volatility, and investor agreement. Applying our bound to U.S. equities yields large price impacts, implying that flows are central to understanding price dynamics. Our bounds align with event-study estimates while revealing novel patterns across horizons, assets, and aggregation levels.

We study bonds issued by the European Union (EU) as joint and several liabilities of its member countries and show that they pay higher interest rates than comparably safe and large sovereign issuers. The spread reflects their greater sensitivity to adverse market shocks, which becomes particularly pronounced during periods of monetary tightening. Using novel data, we document that EU bonds have a small investor base because they are excluded from major fixed-income indices due to their lack of formal sovereign status. This exclusion lowers expected prices during crises, making EU bonds unattractive to investors with liquidity needs, such as mutual funds and foreign central banks. Expectations of state-contingent purchases by the European Central Bank (ECB) can substantially compress this premium even when not directed at EU bonds. A demand-based asset pricing framework suggests that the spread would be negligible if the EU were recognized as a fully sovereign issuer and a new safe asset would arise.

Sovereign bond markets are a cornerstone of the financial system, and their functioning is tightly linked to repo markets, where investors finance long positions and source bonds for short sales. We show theoretically and empirically that bond and repo prices are jointly determined in equilibrium. When demand in the cash bond market exceeds available supply, arbitrageurs accommodate excess

demand by shorting bonds, generating demand for bond borrowing in repo markets. This demand generates a spread between policy and repo rate. In turn, an elastic supply of collateral on the repo market limits the impact of excess demand on bond prices. We provide evidence for this mechanism using novel regulatory data on repos backed by German sovereign bonds. We identify final borrowers

and lenders of securities and estimate sector-specific price elasticities in the repo market. Repo collateral supply, dominated by the public sector, is highly elastic, whereas demand, driven primarily by hedge funds, is strongly inelastic. Hedge funds—the key arbitrageurs in practice—play a central role in the joint clearing of bond and repo markets and in the determination of prices on the two markets. Our results provide a unified framework linking demand pressures in sovereign bond markets to repo pricing, with implications for the pricing of safe assets and the design of monetary policy operations