Academic Curriculum

JOB MARKET PAPER

• How did government bonds become safe? November 2024

Government bonds in advanced economies shifted from moving in sync with stocks to acting as "safe" hedges in the late 1990s, then reverted to being "risky" after 2022. An analysis of twelve countries over the postwar period shows these shifts occurred simultaneously and aren't fully explained by changes in output and inflation. Using a Dynamic Factor Model and a novel identification strategy, I find that financial shocks, driving flight-to-safety dynamics post-1998, better explain the shifts. A model of financial intermediaries in the stock and bond market shows how leveraged funds constrained by risk limits propagate these shocks, altering return comovement and the safety of government bonds.