Working Paper: CEPR ID: DP13899
Authors: Jules H. Van Binsbergen; William Diamond; Marco Grotteria
Abstract: We estimate risk-free interest rates unaffected by convenience yields on safe assets. We infer them from risky asset prices without relying on any specific model of risk. We obtain a term structure of convenience yields with maturities up to 2.5 years at a minutely frequency. The convenience yield on treasuries equals about 40 basis points, is larger below 3 months maturity, and quadruples during the financial crisis. In high-frequency event studies, conventional and unconventional monetary stimulus reduce convenience yields, particularly during the crisis. We further study convenience-yield-free CIP deviations, and we show significant bond return predictability related to convenience yields.
Keywords: Demand for Safe Assets; Convenience Yield; Quantitative Easing; Monetary Policy
JEL Codes: E41; E43; E44; G12; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Convenience yields (D11) |
| Quantitative easing (C54) | Convenience yields (D11) |
| Convenience yields (D11) | Risk-free interest rates (E43) |
| Risk-free interest rates inferred from risky asset prices (E43) | Convenience yields (D11) |
| Convenience yields (D11) | Government bond excess returns (G12) |
| Convenience yields distort relationship between interest rates in different currencies (E43) | Violations of covered interest parity (CIP) (F31) |