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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Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 296.
Date of creation: Jul 2004
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Publication status: Published in Mathematics and Financial Economics, vol.�1, n°2, juillet 2007, p.�81-101.
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- Christian Gollier, 2005. "The Consumption-Based Determinants of the Term Structure of Discount Rates," CESifo Working Paper Series 1375, CESifo Group Munich.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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