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Modeling the Term Structure of Interest Rates Under Nonseparable Utilityand Duriability of Goods

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  • Kenneth B. Dunn
  • Kenneth J. Singleton
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    Abstract

    This paper investigates the term structure relations implied by a two-good model in which goods are durable and the preference function of consimters may be non separable both over time and the decision variables. The parameters characterizing preferences are estimated and the implied restrictions on the comovements of consumptions and the returns from following different investment strategies in bonds are examined. Both the durability of goods (modeled by a linear service technology) and the nonseparability of preferences over services from goods are important factors in explaining the time paths of individual returns. However, substantial evidence against our model is obtained when the restrictions associated with two different investment strategies are studied simultaneously. Specifically, the difference between the sample mean returns are too large relative to the difference between the sample covariances of the returns and the marginal utility from acquiring a unit of the numeraire good. Our findings suggest that these discrepancies are not a consequence of either the relatively small variability in aggregate acquisitions of goods, or our small estimates of relative risk aversion.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1415.

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    Date of creation: Aug 1984
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    Publication status: published as Dunn, Kenneth B. and Kenneth J. Singleton. "Modeling the Term Structure of Interest Rates Under Nonseparable Utility and Durability of Goods," Journal of Financial Economics, Vol. 17, pp. 27-55, 1986.
    Handle: RePEc:nbr:nberwo:1415

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    1. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
    2. Cornell, Bradford, 1981. "The consumption based asset pricing model : A note on potential tests and applications," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(1), pages 103-108, March.
    3. Eichenbaum, Martin S & Hansen, Lars Peter & Singleton, Kenneth J, 1988. "A Time Series Analysis of Representative Agent Models of Consumption and Leisure Choice under Uncertainty," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(1), pages 51-78, February.
    4. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
    5. Ferson, Wayne E., 1983. "Expectations of Real Interest Rates and Aggregate Consumption: Empirical Tests," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 18(04), pages 477-497, December.
    6. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 18-80, Wharton School Rodney L. White Center for Financial Research.
    7. Singleton, Kenneth J, 1980. "Expectations Models of the Term Structure and Implied Variance Bounds," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(6), pages 1159-76, December.
    8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 36(4), pages 769-99, September.
    9. Richard, Scott F. & Sundaresan, M., 1981. "A continuous time equilibrium model of forward prices and futures prices in a multigood economy," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(4), pages 347-371, December.
    10. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
    11. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, Elsevier, vol. 7(3), pages 265-296, September.
    12. Dunn, Kenneth B & Singleton, Kenneth J, 1983. " An Empirical Analysis of the Pricing of Mortgage-Backed Securities," Journal of Finance, American Finance Association, American Finance Association, vol. 38(2), pages 612-23, May.
    13. Prescott, Edward C & Mehra, Rajnish, 1980. "Recursive Competitive Equilibrium: The Case of Homogeneous Households," Econometrica, Econometric Society, Econometric Society, vol. 48(6), pages 1365-79, September.
    14. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
    15. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
    16. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
    17. Rajnish Mehra & Edward C. Prescott, 1982. "A test of the intertemporal asset pricing model," Staff Report, Federal Reserve Bank of Minneapolis 81, Federal Reserve Bank of Minneapolis.
    18. Lars Peter Hansen & Thomas J. Sargent, 1981. "Exact linear rational expectations models: specification and estimation," Staff Report, Federal Reserve Bank of Minneapolis 71, Federal Reserve Bank of Minneapolis.
    19. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 249-65, April.
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    Cited by:
    1. N. Gregory Mankiw, 1986. "The Equity Premium and the Concentration of Aggregate Shocks," NBER Working Papers 1788, National Bureau of Economic Research, Inc.
    2. N. Gregory Mankiw, 1986. "Government Purchases and Real Interest Rates," NBER Working Papers 2009, National Bureau of Economic Research, Inc.
    3. repec:nbr:nberwo:2341 is not listed on IDEAS
    4. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.

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