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How far can the long-run risk model with durable goods explain the variation of the yield curve?

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  • Ikeda, Ryoichi
  • Igarashi, Yoske

Abstract

A consumption-based, long-run risk equilibrium model with nondurable and durable goods is estimated using US nominal interest rate data. The model generates upward-sloping nominal yield curves and nearly flat real yield curves, implying that the term structure of inflation risk premia is upward-sloping. Though both nondurable and durable consumption have statistically significant explanatory power for the movement of the short-term nominal rate, the overall explanatory power of the model is small. The estimated relation between the durable consumption growth and stochastic discount factor is opposite to that in previous studies that estimate similar models with equity data.

Suggested Citation

  • Ikeda, Ryoichi & Igarashi, Yoske, 2024. "How far can the long-run risk model with durable goods explain the variation of the yield curve?," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 444-459.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pa:p:444-459
    DOI: 10.1016/j.iref.2023.07.107
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    More about this item

    Keywords

    Consumption-based model; Long-run risk; Durable consumption; Term structure of interest rates; Inflation risk premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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