scholarly journals A Preferred‐Habitat Model of the Term Structure of Interest Rates

Econometrica ◽  
2021 ◽  
Vol 89 (1) ◽  
pp. 77-112 ◽  
Author(s):  
Dimitri Vayanos ◽  
Jean-Luc Vila
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Large Scale ◽  
Relative Effect ◽  
Habitat Model ◽  
Bond Risk Premia ◽  
Forward Guidance ◽  
Preferred Habitat ◽  
Asset Purchases ◽  
Bond Risk

We model the term structure of interest rates that results from the interaction between investors with preferences for specific maturities and risk‐averse arbitrageurs. Shocks to the short rate are transmitted to long rates through arbitrageurs' carry trades. Arbitrageurs earn rents from transmitting the shocks through bond risk premia that relate positively to the slope of the term structure. When the short rate is the only risk factor, changes in investor demand have the same relative effect on interest rates across maturities regardless of the maturities where they originate. When investor demand is also stochastic, demand effects become more localized. A calibration indicates that long rates underreact to forward‐guidance announcements about short rates. Large‐scale asset purchases can be more effective in moving long rates, especially if they are concentrated at long maturities.

A Consumption Based Term Structure Model w ith Habit Utility

2018 ◽  
Vol 9 (6) ◽  
pp. 484-496
Author(s):  
Jun Lou ◽  
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Bond Yields ◽  
Expectations Hypothesis ◽  
Term Structure Model ◽  
Bond Risk Premia ◽  
The Interest Rate ◽  
Bond Risk

This paper proposes a term structure of interest rates model that modifies and extends the Campbell and Cochrane (1999) surplus consumption framework. The distinguishing contributions are tractable, continuous-time analytical solutions for the term structure of interest rate generating a realistic upward sloping yield curve. Despite the focus on the term structure, the model matches plausible equity quantities. For the interest rate, the model is able to account for the moments of bond yields at numerous maturities and produce countercyclical bond risk premia as seen in the data. Moreover, the model captures reasonable time series fluctuation on real interest rates. However, the model has difficulties reproducing empirical deviations from the expectations hypothesis.

scholarly journals Bond Risk Premia and Gaussian Term Structure Models

2018 ◽  
Vol 64 (3) ◽  
pp. 1413-1439 ◽  
Author(s):  
Bruno Feunou ◽  
Jean-Sébastien Fontaine
Keyword(s):  
Term Structure ◽  
Risk Premia ◽  
Term Structure Models ◽  
Bond Risk Premia ◽  
Bond Risk

scholarly journals Does Forward Guidance Matter in Small Open Economies? Examples from Europe

2019 ◽  
Vol 4 (1) ◽  
pp. 1-26
Author(s):  
Jakub Rybacki
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Open Economies ◽  
Central Banks ◽  
Small Open Economies ◽  
Forecast Horizon ◽  
The Czech Republic ◽  
Forward Guidance ◽  
European Economies

The effect of forward guidance on interest rate expectations in small, open economies is often described as heterogeneous. There are examples when financial markets adjusted term structure to reflect interest rate forecasts provided in the projections published by the central banks. On the other hand, medium-term expectations can persistently deviate from trajectories presented by decision-makers, influenced by foreign monetary policy. Our aim is to find the maximal forecast horizon where the domestic forward guidance of local banks in European economies affects market interest rate expectations strongly as compared to the ECB policy. We analyzed the term structure of interest rates in Sweden, Norway, and the Czech Republic. Central banks in these three economies provide the most mature forward guidance, e.g., regularly publishing interest rate forecasts with detailed discussions. The three-month interbank rate path calculated with the Nelson-Siegel model was contrasted with both the trajectory of policy rates presented in central bank projections and that implied by the three-month EURIBOR. We found that interest rate expectations were more influenced by ECB policy than by domestic assumptions when the forecast horizon exceeds four quarters.

scholarly journals Bond risk premia in consumption‐based models

10.3982/qe887 ◽  
2020 ◽  
Vol 11 (4) ◽  
pp. 1461-1484 ◽  
Author(s):  
Drew D. Creal ◽  
Jing Cynthia Wu
Keyword(s):  
Term Structure ◽  
Time Preference ◽  
Risk Premia ◽  
Recursive Preferences ◽  
Affine Term Structure ◽  
Affine Term Structure Models ◽  
Bond Risk Premia ◽  
Bond Risk ◽  
Term Premia ◽  
Conditional Means

Gaussian affine term structure models attribute time‐varying bond risk premia to changing risk prices driven by the conditional means of the risk factors, while structural models with recursive preferences credit it to stochastic volatility. We reconcile these competing channels by introducing a novel form of stochastic rate of time preference into an otherwise standard model with recursive preferences. Our model is affine and has analytical bond prices making it empirically tractable. We use particle Markov chain Monte Carlo to estimate the model, and find that time variation in bond term premia is predominantly driven by the risk price channel.

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