Demand-driven risk premia in foreign exchange and bond markets / Ingomar Krohn, Andreas Uthemann, Rishi Vala, Jun Yang.: FB3-5/2025-29E-PDF

"We establish an empirical framework that causally identifies how Treasury demand shocks transmit across foreign exchange and global bond markets, providing direct validation of quantity-driven theories of international risk premia. Our identification exploits predetermined auction supply to isolate demand shocks from high-frequency movements in Treasury futures prices around Treasury auctions. A one-standard-deviation increase in Treasury demand causes the U.S. dollar to depreciate by 2 basis points against G9 currencies while generating 10-basis-point increases in foreign bond prices. Effects persist for two weeks, indicating meaningful economic impacts. The transmission mechanism varies systematically across countries: those with lower U.S. short-rate correlations exhibit stronger currency responses but weaker bond effects, while higher-correlation countries show the opposite pattern. This cross-sectional variation provides empirical support for models of segmented markets where global arbitrageurs link exchange rates and bond risk premia"--Abstract, page ii.

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