The Consumption-Based Determinants of the Term Structure of Discount Rates
AbstractThe 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''''
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Date of creation: 2005
Date of revision:
stochastic dominance; yield curve; far distant future; cost-benefit analysis; prudence; temperance; downside risk;
Other versions of this item:
- Gollier, Christian, 2004. "The Consumption-Based Determinants of the Term Structure of Discount Rates," IDEI Working Papers 296, Institut d'Économie Industrielle (IDEI), Toulouse.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-01-16 (All new papers)
- NEP-FIN-2005-01-16 (Finance)
- NEP-FMK-2005-04-15 (Financial Markets)
- NEP-MAC-2005-01-18 (Macroeconomics)
- NEP-MON-2005-01-25 (Monetary Economics)
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