A Demand System Approach for Fixed Income

Monica Barbosa, Joint Program in Financial Economics PhD Student

I (Barbosa) propose a new methodology to help disentangle the demand drivers of government and corporate bond risk premia. I model and estimate a demand system where the set of available assets has a strict factor structure and where investors have a benchmarking motive. The demand curve relates an investor’s portfolio factor loadings to the factors’ risk premia and the factor loadings of a benchmark portfolio. I use this system to estimate mutual funds’ demand for the slope, level, and curvature factors for Treasury bonds. I plan to extend this methodology to other institutional investors, including insurance companies and ETFs, and to other fixed income assets, namely corporate bonds