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The Consumption-Based Determinants of the Term Structure of Discount Rates Author info | Abstract | Publisher info | Download info | Related research | Statistics Christian Gollier ()
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The efficient rate of return of a zero-coupon bond with maturity t is determined by our expectations about the mean (+), variance (-) and skewness (+) of the growth of aggregate consumption between 0 and t. The shape of the yield curve is thus determined by how these moments vary with t. We first examine growth processes in which a higher past economic growth yields a first-degree dominant shift in the distribution of the future economic growth, as assumed for example by Vasicek (1977). We show that when the growth process exhibits such a positive serial correlation, then the yield curve is decreasing if the representative agent is prudent (u'''> 0), because of the increased risk that it yields for the distant future. A similar definition is proposed for the concept of second-degree stochastic correlation, as observed for example in the Cox-Ingersoll-Ross model, with the opposite comparative static property holding under temperance (u''''< 0), because the change in downside risk (or skweness) that it generates. Finally, using these theoretical results, we propose two arguments in favor of using a smaller rate to discount cash-flows with very large maturities, such as those associated to global warming or nuclear waste management.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 1375.
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Date of creation: 2005Date of revision:
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Keywords: stochastic dominance ; yield curve ; far distant future ; cost-benefit analysis ; prudence ; temperance ; downside risk ; Other versions of this item:
Find related papers by JEL classification: E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates G12 - Financial Economics - - General Financial Markets - - - Asset Pricing Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
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GOLLIER Christian, 2008.
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Gollier, Christian, 2009.
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GOLLIER, Christian, 2008.
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n1480105, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
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Other versions: GOLLIER, Christian & KOUNDOURI, Phoebe & PANTELIDIS, Theologos, 2008.
"Declining Discount Rates: Economic Justifications and Implications for Long-Run Policy ,"
IDEI Working Papers
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GOLLIER Christian & KOUNDOURI Phoebe & PANTELIDIS Theologos, 2008.
"Declining Discount Rates : Economic Justifications and Implications for Long-Run Policy ,"
Working Papers
08.17.261, LERNA, University of Toulouse.
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GOLLIER, Christian, 2009.
"Expected Net Present Value, Expected Net Future Value, and the Ramsey Rule ,"
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"Expected Net Present Value, Expected Net Future Value, and the Ramsey Rule ,"
CESifo Working Paper Series
CESifo Working Paper No. , CESifo Group Munich.
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