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Term Structure of Interest Rates under Recursive Preferences in Continuous Time

Author

Listed:
  • Hisashi Nakamura

    (Faculty of Economics, University of Tokyo)

  • Keita Nakayama

    (Graduate School of Economics, University of Tokyo)

  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

Abstract

This paper proposes a testable continuous-time term-structure model with recursive utility to investigate structural relationships between the real economy and the term structure of real and nominal interest rates. Under mean-reverting expectation on real output growth and inflation, this paper finds that, if interest rates tend to be high during economic booms, then a real yield curve slopes up when, and only when, late resolution is preferred strongly enough. Also, even when the real yield curve slopes down, the nominal yield curve may slope up when expected inflation is negatively correlated with the real output growth.

Suggested Citation

  • Hisashi Nakamura & Keita Nakayama & Akihiko Takahashi, 2008. "Term Structure of Interest Rates under Recursive Preferences in Continuous Time," CIRJE F-Series CIRJE-F-540, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2008cf540
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2008/2008cf540.pdf
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    Cited by:

    1. Taiga Saito & Akihiko Takahashi, 2019. "A novel approach to asset pricing with choice of probability measures," CARF F-Series CARF-F-471, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Jan 2021.
    2. Taiga Saito & Akihiko Takahashi, 2021. "Supplementary file for "Sup-inf/inf-sup problem on choice of a probability measure by FBSDE approach (Forthcoming in IEEE Transactions on Automatic Control)"," CARF F-Series CARF-F-507, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    3. Taiga Saito & Akihiko Takahashi, 2021. "Supplementary File for "Sup-Inf/Inf-Sup Problem on Choice of a Probability Measure by FBSDE Approach"," CIRJE F-Series CIRJE-F-1160, CIRJE, Faculty of Economics, University of Tokyo.
    4. Taiga Saito & Akihiko Takahashi, 2019. "A Novel Approach to Asset Pricing with Choice of Probability Measures," CIRJE F-Series CIRJE-F-1131, CIRJE, Faculty of Economics, University of Tokyo.

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