March 3, 2026

Safe Asset Demand

Key Points

The convenience yield is significantly predicted by idiosyncratic volatility, revealing a new aspect of safe asset demand.
Across various firms, this new theory explains 29% of the variation in future convenience yield.
Assessment utilizing exogenous factors like corporate size ensures the findings are clear from confounding influences.
The results highlight the crucial role of corporations as a distinct investor class, changing views on safe assets.

Abstract

I show the new fact that Idiosyncratic volatility significantly predicts the convenience yield. This fact is poses a puzzle with current safe asset theories. I develop a new theory that reconciles this puzzle - a theory I label Safe Asset Demand. Safe Asset Demand explains 29% of future convenience yield variation and is verified in the cross-section of firm treasury holdings. I show that when managers are exposed to moral hazard, corporate demand will be determined by their idiosyncratic risk. I isolate my demand-based effect from confounders by using exogenous cross-sectional variation from corporate size and industry exposures. The results provide support for the importance of corporates as an investor class.

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Safe Asset Demand

Key Points

Abstract

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