Safe Asset Demand

I show the new fact that Idiosyncratic volatility significantly predicts the convenience yield. This fact is poses a puzzle with current safe asset theories. I develop a new theory that reconciles this puzzle - a theory I label Safe Asset Demand. Safe Asset Demand explains 29% of future convenience yield variation and is verified in the cross-section of firm treasury holdings. I show that when managers are exposed to moral hazard, corporate demand will be determined by their idiosyncratic risk. I isolate my demand-based effect from confounders by using exogenous cross-sectional variation from corporate size and industry exposures. The results provide support for the importance of corporates as an investor class.