Granular Treasury Demand with Arbitrageurs, with Kristy Jansen and Lukas Schmid (April 2025)
Supported by NBER grant on Financial Market Frictions and Systemic Risks
Best Paper Award at the JHU Carey Finance Conference 2024
We collect a novel dataset encompassing the vast majority of the portfolio holders of the U.S. Treasury market and estimate granular demand functions for the Federal Reserve and preferred habitat investors. We embed these estimated demand functions in an equilibrium model of the U.S. Treasury market where risk-averse strategic arbitrageurs interact with preferred habitat investors and the Federal Reserve. We find (1) that the Treasury market is elastic because of low estimated arbitrageur risk aversion that significantly weakens demand impact; (2) a positive term premium response to monetary policy tightening due to high estimated cross-elasticities, rationalizing excess sensitivity of long rates; (3) a weak effect of Fed purchases on bond yields unless the Fed credibly commits to a persistent expansion of its balance sheet.
SSRN link; NBER Working Paper version; Presentation Slides
Supported by NBER grant on Financial Market Frictions and Systemic Risks
Best Paper Award at the JHU Carey Finance Conference 2024
We collect a novel dataset encompassing the vast majority of the portfolio holders of the U.S. Treasury market and estimate granular demand functions for the Federal Reserve and preferred habitat investors. We embed these estimated demand functions in an equilibrium model of the U.S. Treasury market where risk-averse strategic arbitrageurs interact with preferred habitat investors and the Federal Reserve. We find (1) that the Treasury market is elastic because of low estimated arbitrageur risk aversion that significantly weakens demand impact; (2) a positive term premium response to monetary policy tightening due to high estimated cross-elasticities, rationalizing excess sensitivity of long rates; (3) a weak effect of Fed purchases on bond yields unless the Fed credibly commits to a persistent expansion of its balance sheet.
SSRN link; NBER Working Paper version; Presentation Slides
Inflation and Treasury Convenience (Aug 2024)
revise & resubmit at The Journal of Finance
with Anna Cieslak and Carolin Pflueger
How does inflation interact with Treasury convenience yield? We find that Treasury convenience comoves positively with inflation during the inflationary 1970s and 1980s, but negatively in the pre-WWII period and the pre-pandemic 2000s. We explain these changes with an interplay of the "money channel" and the "liquidity demand channel", revisiting the general debate between Friedman's monetarist view and Keynes' demand view in the context of convenience yield.
SSRN link; NBER WP Version;
revise & resubmit at The Journal of Finance
with Anna Cieslak and Carolin Pflueger
How does inflation interact with Treasury convenience yield? We find that Treasury convenience comoves positively with inflation during the inflationary 1970s and 1980s, but negatively in the pre-WWII period and the pre-pandemic 2000s. We explain these changes with an interplay of the "money channel" and the "liquidity demand channel", revisiting the general debate between Friedman's monetarist view and Keynes' demand view in the context of convenience yield.
SSRN link; NBER WP Version;
Firm Quality Dynamics and the Slippery Slope of Credit Intervention (April 2025)
Conditionally Accepted at Review of Economic Studies
with Ye Li
In a dynamic model, we demonstrate that the mispricing of government credit support generates a downward bias in the firm quality distribution that is self-perpetuating. As a result, intervention in the current crisis necessitates future interventions of greater scales, which in turn cause more distortions in firm quality dynamics.
SSRN Link
Conditionally Accepted at Review of Economic Studies
with Ye Li
In a dynamic model, we demonstrate that the mispricing of government credit support generates a downward bias in the firm quality distribution that is self-perpetuating. As a result, intervention in the current crisis necessitates future interventions of greater scales, which in turn cause more distortions in firm quality dynamics.
SSRN Link
Dissecting Mechanisms of Financial Crises: Intermediation and Sentiment (May 2024)
Journal of Political Economy, 2024
with Arvind Krishnamurthy
Financial crises feature frothy pre-crisis behavior of asset markets (credit spread/equity price/bank credit) and skewed post-crisis dynamics. What is the underlying mechanism? We confront two prominent mechanisms with data, i.e., financial amplification via intermediation, and sentiment via time-varying beliefs.
SSRN link, NBER WP Version
Download replication package
Journal of Political Economy, 2024
with Arvind Krishnamurthy
Financial crises feature frothy pre-crisis behavior of asset markets (credit spread/equity price/bank credit) and skewed post-crisis dynamics. What is the underlying mechanism? We confront two prominent mechanisms with data, i.e., financial amplification via intermediation, and sentiment via time-varying beliefs.
SSRN link, NBER WP Version
Download replication package
Intermediary Balance Sheets and the Treasury Yield Curve
Journal of Financial Economics, 2023
with Wenxin Du and Benjamin Hébert
We document a regime shift in the Treasury market since the global financial crisis, and connects Treasury pricing with intermediary balance sheet costs in a quantitative model.
For a quick summary, see this Liberty Street Economics Blog Post
Coverage by Wall Street Journal
Also see my NBER LTAM presentation
SSRN link, NBER WP link
Download replication package
Journal of Financial Economics, 2023
with Wenxin Du and Benjamin Hébert
We document a regime shift in the Treasury market since the global financial crisis, and connects Treasury pricing with intermediary balance sheet costs in a quantitative model.
For a quick summary, see this Liberty Street Economics Blog Post
Coverage by Wall Street Journal
Also see my NBER LTAM presentation
SSRN link, NBER WP link
Download replication package
The Demand for Money, Near-Money, and Treasury Bonds
Review of Financial Studies, 2022
Arthur Warga Award for Best Paper in Fixed Income, SFS Cavalcade, 2022
with Arvind Krishnamurthy
SSRN link, NBER WP link
Review of Financial Studies, 2022
Arthur Warga Award for Best Paper in Fixed Income, SFS Cavalcade, 2022
with Arvind Krishnamurthy
SSRN link, NBER WP link
Public Liquidity and Financial Crises
American Economic Journal: Macroeconomics, 2024
2019 Cubist Systematic Strategies Ph.D. Candidate Award for Outstanding Research
SSRN link
Media Coverage: Op-ed on Liquidity Policies after COVID-19 , by Nasdaq
American Economic Journal: Macroeconomics, 2024
2019 Cubist Systematic Strategies Ph.D. Candidate Award for Outstanding Research
SSRN link
Media Coverage: Op-ed on Liquidity Policies after COVID-19 , by Nasdaq
The Passthrough of Treasury Supply to Bank Deposit Funding (Jan 2023)
with Yiming Ma and Yang Zhao
revise & resubmit at Journal of Financial Economics
Using branch-level deposit data, we show that larger Treasury supply leads to deposit outflows, and the effect is stronger with more fierce local deposit competition. At the same time, reliance on wholesale funding decreases.
We rationalize these findings in a model with imperfect deposit competition.
Arthur Warga Award for Best Paper in Fixed Income, SFS Cavalcade, 2020
SSRN link, Presentation Slides
Media Coverage:
The Fed must be careful to avoid bank deposit crowding out , by Central Banking
Impact of Treasury Supply Versus Monetary Policy on Bank Deposit Funding, by PR Newswire
with Yiming Ma and Yang Zhao
revise & resubmit at Journal of Financial Economics
Using branch-level deposit data, we show that larger Treasury supply leads to deposit outflows, and the effect is stronger with more fierce local deposit competition. At the same time, reliance on wholesale funding decreases.
We rationalize these findings in a model with imperfect deposit competition.
Arthur Warga Award for Best Paper in Fixed Income, SFS Cavalcade, 2020
SSRN link, Presentation Slides
Media Coverage:
The Fed must be careful to avoid bank deposit crowding out , by Central Banking
Impact of Treasury Supply Versus Monetary Policy on Bank Deposit Funding, by PR Newswire
Deep Learning for Solving and Estimating Dynamic Macro-finance Models
Computational Economics, 2024
with Benjamin Fan, Edward Qiao, Anran Jiao, Zhouzhou Gu, and Lu Lu
We develop a methodology that utilizes deep learning to simultaneously solve and estimate canonical continuous-time general equilibrium models in financial economics.
Computational Economics, 2024
with Benjamin Fan, Edward Qiao, Anran Jiao, Zhouzhou Gu, and Lu Lu
We develop a methodology that utilizes deep learning to simultaneously solve and estimate canonical continuous-time general equilibrium models in financial economics.
The Term Structure of Liquidity Premium (March 2021)
with Scott Joslin and Yang Song
We empirically construct the term structure of liquidity premium (LP) and show that the term structure arises from a simple model with time-varying liquidity conditions and imperfect substitution between money and Treasurys.
The LP term structure contains rich information about: (i) expectation of future liquidity conditions, (ii) liquidity term premium, (iii) the substitutability between money and Treasurys, and (iv) Treasury supply. These results inform the heterogeneous impact of Quantitative Easing (QE) on the term structure. We are also able to extract the term structure of Treasury safety premium.
SSRN link
with Scott Joslin and Yang Song
We empirically construct the term structure of liquidity premium (LP) and show that the term structure arises from a simple model with time-varying liquidity conditions and imperfect substitution between money and Treasurys.
The LP term structure contains rich information about: (i) expectation of future liquidity conditions, (ii) liquidity term premium, (iii) the substitutability between money and Treasurys, and (iv) Treasury supply. These results inform the heterogeneous impact of Quantitative Easing (QE) on the term structure. We are also able to extract the term structure of Treasury safety premium.
SSRN link