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

Abstract

Waters for providing valuable insights into the workings of the FHLB System's Office of Finance and for access to the FHLB discount note data. We are especially grateful to Scott Frame for detailed suggestions that have significantly improved the paper. We are indebted to John Boschen, Robin Greenwood, Rachna Prakash, Katharina Reinhard, Claire Rosenfeld, Clovis Rugemintwari, Vijay Singal and seminar participants at the 2010 FMA European Conference, the French Finance Association 2010 International Spring Meeting, Virginia Tech and the College of William and Mary for helpful comments. We also thank Chuck Andreatta, Lee Grandy and Brad Hill for providing the Treasury bill issuance data. The opinions, findings, conclusions, and recommendations expressed herein are those of the authors and do not necessarily reflect those of the Office of Finance of the FHLB System. The authors are solely responsible for any remaining errors.Electronic copy available at: http://ssrn.com/abstract=1452910 ABSTRACTWe 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 2,900 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 downwardsloping 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.

Effect of increased uncertainty on financial asset holding

“…Thus, increased uncertainty decreases the current level of investment in financial assets. Atanasov and Merrick (2010) estimated the slope of the Marshallian demand curve for newly auctioned Federal Home Loan Bank (FHLB) discount notes in USA and investigated the impacts of arbitrage risk and heterogeneity of beliefs on demand elasticity. They used a dataset containing about 2,900 observations of two price quantity pairs: the first from a pre-auction dealer survey and the second from actual auction results.…”

Demand Elasticities of Bitcoin and Ethereum

“…In this paper, we derive robust estimates of demand elasticity along three dimensions, i.e., price, transaction fees and energy, for the two main proof-of-work cryptocurrencies -Bitcoin and Ethereum. 1 Elasticity of financial assets is a central element in asset pricing theory (Atanasov and Merrick, 2011) as it helps predict movements in asset demand following changes in key parameters.…”