VGSF - WU Vienna - LC

Lukas Schmid, Duke University, Fuqua School of Business

online via Microsoft Teams Live Events 17:30 - 18:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Lukas Schmid from the Duke Uni­versity, Fuqua School of Busi­ness to present his re­search pa­per.
Per­sonal Webpage


The Risks of Safe As­sets

US gov­ern­ment bonds ex­hibit char­ac­ter­ist­ics often at­trib­uted to safe as­sets. A long lit­er­at­ure doc­u­ments sig­ni­fic­ant con­veni­ence yields in scarce US Treas­ur­ies, sug­gest­ing that rising Treas­ury sup­ply and gov­ern­ment debt comes with a de­clin­ing li­quid­ity premium. We em­pir­ic­ally doc­u­ment and the­or­et­ic­ally identify a novel fis­cal cost through a dual role for gov­ern­ment debt. Through a li­quid­ity chan­nel an in­crease in gov­ern­ment debt im­proves li­quid­ity and lowers li­quid­ity premia by fa­cil­it­at­ing debt rollover, thereby re­du­cing credit spreads. Through an un­cer­tainty chan­nel, rising gov­ern­ment debt cre­ates policy un­cer­tainty, rais­ing de­fault risk premia. We in­ter­pret and  quant­it­at­ively evalu­ate these two chan­nels through the lens of a gen­eral equi­lib­rium as­set pri­cing model with li­quid­ity and credit risk with a rich fis­cal sector. The cal­ib­rated model gen­er­ates quant­it­at­ively real­istic li­quid­ity spreads and de­fault risk premia, and sug­gests that rising gov­ern­ment debt re­duces li­quid­ity premia, but crowds out cor­por­ate debt fin­an­cing and in­vest­ment, and cre­ates en­do­gen­ous tax volat­il­ity, re­flec­ted in higher credit spreads, risk premia, and con­sump­tion volat­il­ity. Our model im­plies that these ef­fects are ex­acer­bated in times of fis­cal stress. There­fore, in­creas­ing safe as­set sup­ply can be risky, and come at a sig­ni­fic­ant fis­cal cost.

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