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A Preferred-Habitat Model of the Term Structure of Interest Rates

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  • Dimitri Vayanos
  • Jean-Luc Vila

Abstract

We model the term structure of interest rates as resulting from the interaction between investor clienteles with preferences for specific maturities and risk-averse arbitrageurs. Because arbitrageurs are risk averse, shocks to clienteles' demand for bonds affect the term structure---and constitute an additional determinant of bond prices to current and expected future short rates. At the same time, because arbitrageurs render the term structure arbitrage-free, demand effects satisfy no-arbitrage restrictions and can be quite different from the underlying shocks. We show that the preferred-habitat view of the term structure generates a rich set of implications for bond risk premia, the effects of demand shocks and of shocks to short-rate expectations, the economic role of carry trades, and the transmission of monetary policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15487.

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Date of creation: Nov 2009
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Handle: RePEc:nbr:nberwo:15487

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  1. Ben Bernanke and the Term Structure of Interest Rates
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-03-19 22:08:00
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