Event Details

Accounting and Finance, Finance seminar to be presented by Professor Lukas Schmid, Marshall School of Business, University of Southern California. Paper title: Granular Treasury Demand with Arbitrageurs.

Lukas Schmid - USC Marshall

Abstract

We construct a novel dataset of sector-level U.S. Treasury holdings, covering the majority of

the market. Using this dataset, we estimate maturity-specific demand functions and elasticities

of different investors and the Fed, and integrate them into a dynamic equilibrium model of the

Treasury market with risk-averse arbitrageurs. Quantifying the model reveals that (1) strong

arbitrage leads to an elastic Treasury market and a steeply downward-sloping term structure of

market elasticity; (2) monetary tightening raises term premia due to arbitrageurs interacting

with investors exhibiting high cross-elasticities; (3) QE has limited impact unless the Fed

credibly commits to sustained balance sheet expansion.

Keywords: Treasury demand; financial intermediaries; arbitrage; monetary policy; quantitative easing.