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Structural Models of Interest Rate Determination and Portfolio Behavior in the Corporate and Government Bond Markets

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  • Benjamin M. Friedman
  • V. Vance Roley

Abstract

This paper summarizes some recent work in which we have modeled long-term interest rate determination in an explicit demand-supply context, using multi-equation structural models and directly contrasts such models with unrestricted reduced-form models. Wholly apart from questions of disaggregation and institutional detail, the explicitly structural nature of demand-supply models necessitates additional theoretical constructs beyond those required by unrestricted reduced-form models. Some of these conceptual inputs are already available from established portfolio theory, and others represent objects of current or prospective research. Experience to date with structural models of long-term interest rate determination suggests, however, that the exploitation of the richer theoretical framework yields not only insights about portfolio behavior but, very likely, improved interest rate models as well.

Suggested Citation

  • Benjamin M. Friedman & V. Vance Roley, 1981. "Structural Models of Interest Rate Determination and Portfolio Behavior in the Corporate and Government Bond Markets," NBER Working Papers 0205, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0205 Note: ME
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    References listed on IDEAS

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    1. Friedman, Benjamin Morton, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Scholarly Articles 4554309, Harvard University Department of Economics.
    2. Fama, Eugene F, 1970. "Multiperiod Consumption-Investment Decisions," American Economic Review, American Economic Association, vol. 60(1), pages 163-174, March.
    3. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
    4. Modigliani, Franco & Shiller, Robert J, 1973. "Inflation, Rational Expectations and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, vol. 40(157), pages 12-43, February.
    5. Friedman, Benjamin M, 1979. "Substitution and Expectation Effects on Long-Term Borrowing Behavior and Long-Term Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(2), pages 131-150, May.
    6. Paul A. Samuelson, 1970. "The Fundamental Approximation Theorem of Portfolio Analysis in terms of Means, Variances and Higher Moments," Review of Economic Studies, Oxford University Press, vol. 37(4), pages 537-542.
    7. Benjamin M. Friedman, 1978. "Who Puts the Inflation Premium Into Nominal Interests Rates?," NBER Working Papers 0231, National Bureau of Economic Research, Inc.
    8. Backus, David, et al, 1980. "A Model of U.S. Financial and Nonfinancial Economic Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(2), pages 259-293, Special I.
    9. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    10. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    11. Friedman, Benjamin M, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 661-689, August.
    12. James M. Brundy & Dale W. Jorgenson, 1971. "Efficient estimation of simultaneous equations by instrumental variables," Working Papers in Applied Economic Theory 3, Federal Reserve Bank of San Francisco.
    13. Friedman, Benjamin M, 1978. "Who Puts the Inflation Premium into Nominal Interest Rates?," Journal of Finance, American Finance Association, vol. 33(3), pages 833-845, June.
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