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A term structure model with preferences for the timing of resolution of uncertainty (*)

Author

Listed:
  • Costis Skiadas

    (J. L. Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208-2001, USA)

  • Mark Schroder

    (School of Management, SUNY at Buffalo, Buffalo, NY 14260-4000, USA)

  • Darrell Duffie

    (Graduate School of Business, Stanford University, Stanford CA 94305-5015, USA)

Abstract

In this paper we present a model of the term structure of interest rates with imperfect information and stochastic differential utility, a form of non-additive recursive utility. A principal feature of recursive utility, that distinguishes it from time-separable expected utility, is its dependence on the timing of resolution of uncertainty. In our model, we parametrize the non-linearity of recursive utility in a way that corresponds to preferences for the timing of resolution. This way we show explicitly the dependence of prices on the rate of information, as a consequence of the nature of utilities. State prices and the term structure of interest rates are obtained in closed form, and are shown to have a form in which derivative asset pricing is tractable. Comparative statics relating to the dependence of the term structure on the rate of information are also discussed.

Suggested Citation

  • Costis Skiadas & Mark Schroder & Darrell Duffie, 1996. "A term structure model with preferences for the timing of resolution of uncertainty (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 3-22.
    • Handle: RePEc:spr:joecth:v:9:y:1996:i:1:p:3-22
    Note: Received: April 10, 1995;revised version October 10, 1995
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