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A production-based model for the term structure

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  • Jermann, Urban J.

Abstract

This paper considers the term structure of interest rates implied by a production-based asset pricing model in which the fundamental drivers are investment in equipment and structures as well as inflation. The model matches the average yield curve up to five-year maturity almost perfectly. Longer term yields are roughly as volatile as in the data. The model also generates time-varying bond risk premiums. In particular, when running Fama-Bliss regressions of excess returns on forward premiums, the model produces slope coefficients of roughly half the size of the empirical counterparts. Closed-form expressions highlight the importance of the capital depreciation rates for interest rate dynamics.

Suggested Citation

  • Jermann, Urban J., 2013. "A production-based model for the term structure," Journal of Financial Economics, Elsevier, vol. 109(2), pages 293-306.
    • Handle: RePEc:eee:jfinec:v:109:y:2013:i:2:p:293-306
    DOI: 10.1016/j.jfineco.2013.03.001
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    Citations

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    Cited by:

    1. John H. Cochrane, 2016. "The Habit Habit," Economics Working Papers 16105, Hoover Institution, Stanford University.
    2. Howard Kung, 2014. "Macroeconomic linkages between monetary policy and the term structure of interest rates," 2014 Meeting Papers 560, Society for Economic Dynamics.
    3. Bernard Herskovic, 2015. "Networks in Production: Asset Pricing Implications," 2015 Meeting Papers 378, Society for Economic Dynamics.
    4. John H. Cochrane, 2019. "Rethinking Production Under Uncertainty," NBER Working Papers 26535, National Bureau of Economic Research, Inc.
    5. Liu, Laura Xiaolei & Zhang, Lu, 2014. "A neoclassical interpretation of momentum," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 109-128.
    6. Thien Nguyen, 2019. "Public Debt and the Slope of the Term Structure," 2019 Meeting Papers 957, Society for Economic Dynamics.
    7. Adriana Grasso & Filippo Natoli, 2018. "Consumption volatility risk and the inversion of the yield curve," Temi di discussione (Economic working papers) 1169, Bank of Italy, Economic Research and International Relations Area.
    8. John H. Cochrane, 2017. "Macro-Finance," Review of Finance, European Finance Association, vol. 21(3), pages 945-985.
    9. Frederico Belo & Chen Xue & Lu Zhang, 2013. "A Supply Approach to Valuation," The Review of Financial Studies, Society for Financial Studies, vol. 26(12), pages 3029-3067.
    10. Ehab Yamani & David Rakowski, 2018. "Cash Flow and Discount Rate Risk in the Investment Effect: A Downside Risk Approach," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-40, September.
    11. Peter Feldhütter & Christian Heyerdahl-Larsen & Philipp Illeditsch, 2018. "Risk Premia and Volatilities in a Nonlinear Term Structure Model [Quadratic term structure models: theory and evidence]," Review of Finance, European Finance Association, vol. 22(1), pages 337-380.
    12. Jamali, Ibrahim & Yamani, Ehab & Smallwood, Aaron D., 2023. "An investment-based explanation of currency excess returns," Journal of International Money and Finance, Elsevier, vol. 133(C).
    13. Feng Zhao & Guofu Zhou & Xiaoneng Zhu, 2021. "Unspanned Global Macro Risks in Bond Returns," Management Science, INFORMS, vol. 67(12), pages 7825-7843, December.
    14. Kung, Howard, 2015. "Macroeconomic linkages between monetary policy and the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 115(1), pages 42-57.
    15. Indrajit Mitra & Yu Xu, 2020. "Limited Household Risk Sharing: General Equilibrium Implications for the Term Structure of Interest Rates," FRB Atlanta Working Paper 2020-20, Federal Reserve Bank of Atlanta.
    16. Kozak, Serhiy, 2022. "Dynamics of bond and stock returns," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 188-209.
    17. Martin M. Andreasen, 2019. "Explaining Bond Return Predictability in an Estimated New Keynesian Model," CREATES Research Papers 2019-11, Department of Economics and Business Economics, Aarhus University.

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    More about this item

    Keywords

    Production-based asset pricing; Term structure;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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