Equilibrium Positive Interest Rates: A Unified View
AbstractThis article develops precise connections among two general approaches to building interest rate models: a general equilibrium approach using a pricing kernel and the Heath, Jarrow, and Morton framework based on specifying forward rate volatilities and the market price of risk. The connections exploit the observation that a pricing kernel is uniquely determined by its drift. Through these connections we provide, for any arbitrage-free term structure model, a representative-consumer real production economy supporting that term structure model in equilibrium. We put particular emphasis on models in which interest rates remain positive. By modeling the dynamics of the drift of the pricing kernel, we construct a new family of Markovian-positive interest rate models. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
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Bibliographic InfoArticle provided by Society for Financial Studies in its journal Review of Financial Studies.
Volume (Year): 14 (2001)
Issue (Month): 1 ()
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- Enlin Pan & Liuren Wu, 2004. "Taking Positive Interest Rates Seriously," Finance 0409013, EconWPA.
- Lioui, Abraham & Poncet, Patrice, 2004. "General equilibrium real and nominal interest rates," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1569-1595, July.
- Pierre Collin-Dufresne & Christopher S. Jones & Robert S. Goldstein, 2004. "Can Interest Rate Volatility be Extracted from the Cross Section of Bond Yields? An Investigation of Unspanned Stochastic Volatility," NBER Working Papers 10756, National Bureau of Economic Research, Inc.
- repec:ebl:ecbull:v:7:y:2003:i:4:p:1-11 is not listed on IDEAS
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