Abstract: We study the determinants of US dollar demand across market participants and traded instruments using survey-based exchange rate and macroeconomic expectations. Leveraging granular FX trading data and forward looking expectations, we present three results. First, currency investors increase their dollar holdings when expecting US dollar appreciation or improved US macroeconomic fundamentals, whereas synthetic dollar funding is driven by forecasted CIP deviations. Second, cross-sectionally, investors rebalance along the factor structure of currency risk into dollars following an expected dollar appreciation. Third, responses to professional forecasts weaken when uncertainty or forecaster disagreement rises, and are lower for forecasters with poorer past accuracy. Our findings demonstrate that long-horizon expectations accurately predict dollar demand across spot, swap, and forward currency markets. We rationalize those finding in a theoretical model of currency demand.

Abstract: We investigate how frictions in euro area repo markets distort the setting of haircuts — often presented as the main risk management tool in repo transactions. Using unique European repo data, we show that balance sheet constraints, collateral heterogeneity, and dealer market power lead to suboptimal haircuts, especially in collateral-driven repos. We develop a theoretical model explaining these distortions and their effects on market outcomes. Our findings highlight the underlying frictions behind suboptimal haircuts which result in more volatile repo rates and volumes, and have important implications for monetary policy and financial stability.

Abstract: I provide the first systematic analysis of collateral choices in one of the main short-term funding markets, the repurchase agreement (repo) market. In repos, long-term bonds serve as collateral connecting short-term and long-term funding markets. In general collateral repos, banks can choose from a list of eligible bonds. Surprisingly, they often deliver more expensive on-the-run bonds rather than cheapest-to-post securities. I rationalize this behaviour using a theoretical model linking the repo and bond markets. My results are relevant for explaining bond market patterns that are different in the euro area compared to the United States.

Talks: Federal Reserve / University of Maryland Short-Term Funding Markets Conference, SFI Research Days, Finance Forum, FMA European Conference, World Finance Conference, SAFE Market Microstructure Conference, Annual Meeting of the German Finance Association (doctoral workshop), GPEF PhD Day, New Zealand Finance Meeting, Central Bank Conference on Microstructure of Financial Markets, American Economic Association (poster session), International Conference on Sovereign Bond Markets, Annual Meeting of the Central Bank Research Association, Conference of the Portuguese Finance Network, European Economic Association Annual Meeting, SWFA Annual Conference, AFFI Conference, RCEA International Conference, Future Finance Fest, Southern Finance Association Annual Meeting, University of St. Gallen, University of Maryland, University of Rochester, Federal Reserve Board of Governors, McMaster University, Universidad Carlos III de Madrid, Maastricht University, Sveriges Riksbank, and University of Cologne.

Abstract: A repurchase agreement (repo) is a source of funding and collateral. We document that the money market is more segmented when the collateral motive prevails. Two crucial aspects of the central bank framework lead to this disconnect: banks' access to the central bank's deposit facility and assets' eligibility for Quantitative Easing (QE). We show that repo rates lent by banks with access to the deposit facility and secured by QE eligible assets are more collateral-driven and disconnected from funding-based money market rates. Our results are relevant for different monetary policies and have suggestive implications for the monetary policy pass-through. 

Talks: University of St. Gallen, Goethe University Frankfurt, American Economic Association, Young Swiss Economist Meeting, Norges Bank, ECB-RFS Macro-Finance Conference, Eastern Finance Association, Swiss National Bank, SFI Research Days, Swiss Society of Economics and Statistics Congress, World Finance Conference, Conference of the Money, Macro and Finance Society, SNB Research Conference, Central Bank Conference on the Microstructure of Financial Markets, RCEA Conference, and ECB Conference on Money Markets.

Abstract: We provide the first systematic asset pricing analysis of one of the main safe asset categories, the repurchase agreement (repo). Based on the temporal and cross-sectional variation in short-term rates, we form a carry that, together with a market factor, prices these near-money assets in a linear pricing model. The carry depicts heterogeneity in nonpecuniary convenience yields of collateral assets and increases in the safety premium and the liquidity premium reflecting opportunity cost. Our carry helps explain the cross-section of short-term rates, as well as of long-term bond returns after accounting for standard bond pricing factors. 

Talks: University of St. Gallen, Northern Finance Association, FED / Bank of Canada Conference on Fixed Income Markets, American Economic Association (poster session), University of Nottingham, American Finance Association (poster session), International Conference of the French Finance Association, SFI Research Days, Finance Forum, Swedish House of Finance Annual Conference, European Finance Association, American Finance Association, Midwest Finance Association, and INQUIRE Europe Joint Autumn Seminar.