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Structural Models of Interest Rate Determination and Portfolio Behavior in the Corporate and Government Bond Markets

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  • Benjamin M. Friedman
  • V. Vance Roley
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    Abstract

    This paper summarizes some recent work in which we have modeled long-term interest rate determination in an explicit demand-supply context, using multi-equation structural models and directly contrasts such models with unrestricted reduced-form models. Wholly apart from questions of disaggregation and institutional detail, the explicitly structural nature of demand-supply models necessitates additional theoretical constructs beyond those required by unrestricted reduced-form models. Some of these conceptual inputs are already available from established portfolio theory, and others represent objects of current or prospective research. Experience to date with structural models of long-term interest rate determination suggests, however, that the exploitation of the richer theoretical framework yields not only insights about portfolio behavior but, very likely, improved interest rate models as well.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0205.

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    Date of creation: Jan 1981
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    Publication status: published as Friedman, Benjamin M. and Roley, V. Vance. "Models of Long-Term Interest Rate Determination." The Journal of Portfolio Management, Vol. 6, No. 3, (Spring 1980), pp. 35-45.
    Handle: RePEc:nbr:nberwo:0205

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    1. Friedman, Benjamin M, 1978. "Who Puts the Inflation Premium into Nominal Interest Rates?," Journal of Finance, American Finance Association, vol. 33(3), pages 833-45, June.
    2. David Backus & William C. Brainard & Gary Smith & James Tobin, 1980. "A Model of U.S. Financial and Nonfinancial Economic Behavior," Cowles Foundation Discussion Papers 548, Cowles Foundation for Research in Economics, Yale University.
    3. Fama, Eugene F, 1970. "Multiperiod Consumption-Investment Decisions," American Economic Review, American Economic Association, vol. 60(1), pages 163-74, March.
    4. Modigliani, Franco & Shiller, Robert J, 1973. "Inflation, Rational Expectations and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, vol. 40(157), pages 12-43, February.
    5. Friedman, Benjamin M, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 661-89, August.
    6. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers 14, Cowles Foundation for Research in Economics, Yale University.
    7. Benjamin M. Friedman, 1978. "Who Puts the Inflation Premium Into Nominal Interests Rates?," NBER Working Papers 0231, National Bureau of Economic Research, Inc.
    8. Samuelson, Paul A, 1970. "The Fundamental Approximation Theorem of Portfolio Analysis in terms of Means, Variances, and Higher Moments," Review of Economic Studies, Wiley Blackwell, vol. 37(4), pages 537-42, October.
    9. Friedman, Benjamin M, 1979. "Substitution and Expectation Effects on Long-Term Borrowing Behavior and Long-Term Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(2), pages 131-50, May.
    10. James M. Brundy & Dale W. Jorgenson, 1971. "Efficient estimation of simultaneous equations by instrumental variables," Working Papers in Applied Economic Theory 3, Federal Reserve Bank of San Francisco.
    11. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
    12. Friedman, Benjamin Morton, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Scholarly Articles 4554309, Harvard University Department of Economics.
    13. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
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