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Financial asset demand is elastic: Evidence from new issues of Federal Home Loan Bank debt

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  • Atanasov, Vladimir
  • Merrick, John

Abstract

We estimate the slope of the demand curve for newly auctioned FHLB discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity. Our unique dataset of roughly 2900 observations of two price-quantity pairs—the first from a pre-auction dealer survey, the second from actual auction results—provides the quantity shift necessary to identify demand. In contrast to previous findings of downward-sloping demand curves for equities, we show that demand for newly issued FHLB notes is nearly perfectly elastic during normal market conditions. We find, however, that frictions like arbitrage risk and, to a lesser extent, heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50% drop in elasticity observed during the recent financial crisis.

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  • Atanasov, Vladimir & Merrick, John, 2011. "Financial asset demand is elastic: Evidence from new issues of Federal Home Loan Bank debt," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3225-3239.
    • Handle: RePEc:eee:jbfina:v:35:y:2011:i:12:p:3225-3239
    DOI: 10.1016/j.jbankfin.2011.05.005
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    More about this item

    Keywords

    Debt; Demand elasticity; Arbitrage risk; Federal Home Loan Bank;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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