Download
Abstract
The corporate basis measures price differences between bonds issued in U.S. dollars and foreign currencies by the same entity. We introduce a novel decomposition into credit spread and convenience yield components, capturing investor demand for risky and safe dollar assets. With a comprehensive dataset of corporate bond issuance and pricing, we employ bond market liquidity, investor sentiment, and monetary policy as instruments to identify shocks to the demand for dollar assets. A negative shock to risky dollar asset demand shifts investors toward safe dollar assets and is associated with U.S. dollar appreciation and a subsequent decline in real economic activity.