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Equilibrium Positive Interest Rates: A Unified View

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  • Jin, Yan
  • Glasserman, Paul

Abstract

This article develops precise connections among two general approaches to building interest rate models: a general equilibrium approach using a pricing kernel and the Heath, Jarrow, and Morton framework based on specifying forward rate volatilities and the market price of risk. The connections exploit the observation that a pricing kernel is uniquely determined by its drift. Through these connections we provide, for any arbitrage-free term structure model, a representative-consumer real production economy supporting that term structure model in equilibrium. We put particular emphasis on models in which interest rates remain positive. By modeling the dynamics of the drift of the pricing kernel, we construct a new family of Markovian-positive interest rate models. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Jin, Yan & Glasserman, Paul, 2001. "Equilibrium Positive Interest Rates: A Unified View," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 187-214.
  • Handle: RePEc:oup:rfinst:v:14:y:2001:i:1:p:187-214
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    Cited by:

    1. Likuan Qin & Vadim Linetsky, 2014. "Positive Eigenfunctions of Markovian Pricing Operators: Hansen-Scheinkman Factorization, Ross Recovery and Long-Term Pricing," Papers 1411.3075, arXiv.org, revised Sep 2015.
    2. Lioui, Abraham & Poncet, Patrice, 2004. "General equilibrium real and nominal interest rates," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1569-1595, July.
    3. repec:gam:jrisks:v:6:y:2018:i:1:p:18-:d:134969 is not listed on IDEAS
    4. repec:ebl:ecbull:v:7:y:2003:i:4:p:1-11 is not listed on IDEAS
    5. Pierre Collin-Dufresne & Christopher S. Jones & Robert S. Goldstein, 2004. "Can Interest Rate Volatility be Extracted from the Cross Section of Bond Yields? An Investigation of Unspanned Stochastic Volatility," NBER Working Papers 10756, National Bureau of Economic Research, Inc.
    6. Enlin Pan & Liuren Wu, 2004. "Taking Positive Interest Rates Seriously," Finance 0409013, EconWPA.
    7. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
    8. Likuan Qin & Vadim Linetsky, 2014. "Long Term Risk: A Martingale Approach," Papers 1411.3078, arXiv.org, revised Oct 2016.
    9. Likuan Qin & Vadim Linetsky, 2016. "The Long Bond, Long Forward Measure and Long-Term Factorization in Heath-Jarrow-Morton Models," Papers 1610.00818, arXiv.org, revised Jul 2017.
    10. Dorje C. Brody & Lane P. Hughston, 2013. "Social Discounting and the Long Rate of Interest," Papers 1306.5145, arXiv.org, revised Sep 2015.

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