Incomplete markets, liquidation risk and the term structure of interest rates
AbstractWe construct a general equilibrium model with incomplete markets and borrowing constraints, in order to study the term structure of real interest rates. Agents are subject to both aggregate and idiosyncratic income shocks, which latter may force them into early portfolio liquidation whilst in recession. We derive a closed-form equilibrium with limited agents heterogeneity (despite market incompleteness), which allows us to derive analytical expressions for bond prices and returns at any maturity. The desirability of bonds as liquidity makes the aggregate bond demand downward-sloping. One consequence of this is that a larger bond supply raises both the level and the slope of the yield curve.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Working Papers with number halshs-00587679.
Date of creation: Dec 2007
Date of revision:
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00587679
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
incomplete markets ; yield curve ; credit constraints;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Y. Campbell & Robert J. Shiller, 1991.
"Yield Spreads and Interest Rate Movements: A Bird's Eye View,"
NBER Working Papers
3153, National Bureau of Economic Research, Inc.
- Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 495-514, May.
- Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
- Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- S. Rao Aiyagari, 1993.
"Uninsured idiosyncratic risk and aggregate saving,"
502, Federal Reserve Bank of Minneapolis.
- Fleming, Michael J, 2002.
"Are Larger Treasury Issues More Liquid? Evidence from Bill Reopenings,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 34(3), pages 707-35, August.
- Michael J. Fleming, 2002. "Are larger Treasury issues more liquid? Evidence from bill reopenings," Proceedings, Federal Reserve Bank of Cleveland, pages 707-739.
- Michael J. Fleming, 2002. "Are larger Treasury issues more liquid? Evidence from bill reopenings," Staff Reports 145, Federal Reserve Bank of New York.
- Constantinides,George & Duffie,Darrel, 1992.
"Asset pricing with heterogeneous consumers,"
Discussion Paper Serie A
381, University of Bonn, Germany.
- Duffee, Gregory R, 1996.
" Idiosyncratic Variation of Treasury Bill Yields,"
Journal of Finance,
American Finance Association, vol. 51(2), pages 527-51, June.
- Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
- Amihud, Yakov & Mendelson, Haim, 1991. " Liquidity, Maturity, and the Yields on U.S. Treasury Securities," Journal of Finance, American Finance Association, vol. 46(4), pages 1411-25, September.
- Edouard Challe & Xavier Ragot, 2013.
"Precautionary Saving over the Business Cycle,"
PSE Working Papers
- Xavier Ragot & Francois Le Grand, 2010.
"Prices and volumes of options: A simple theory of risk sharing when markets are incomplete,"
2010 Meeting Papers
300, Society for Economic Dynamics.
- Le Grand, F. & Ragot, X., 2010. "Prices and volumes of options: A simple theory of risk sharing when markets are incomplete," Working papers 302, Banque de France.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.