Arbeitspapier
Equilibrium yield curves under regime switching
This paper studies how inflation as a macroeconomic indicator affects nominal bond prices. I consider an economy with a representative agent with Epstein-Zin preferences. Regime switching affects the state-space capturing inêation and consumption growth. Thus, the agent is concerned about the intertemporal distribution of risk, which is affected by the persistence of the variables and the regimes. Regime switching allows for structural changes in the volatility of unexpected shocks. To the extent that inêationary unexpected shocks indicate lower consumption growth, nominal bond holders need to be compensated for these shocks. It follows that a switch in the regime state affecting the covariance of inflation and consumption growth can be interpreted as a change in the price of risk. I find coefficients of risk aversion from 40 to 90, and subjective discount factors above 0.99, depending on the exact specification of the model. The model yields have on average a positive slope, a consistent Principal Components decomposition, and predictability as in Cochrane and Piazzesi (2002).
- Language
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Englisch
- Bibliographic citation
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Series: Working Papers ; No. 2010-08
- Classification
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Wirtschaft
Asset Pricing; Trading Volume; Bond Interest Rates
Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Interest Rates: Determination, Term Structure, and Effects
Financial Markets and the Macroeconomy
Price Level; Inflation; Deflation
- Subject
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Consumption-based Asset Pricing
Regime Switching
Recursive Preferences
Yield Curve
Term Structure of Interest Rates
Kapitaleinkommen
Zinsstruktur
CAPM
- Event
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Geistige Schöpfung
- (who)
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García-Verdú, Santiago
- Event
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Veröffentlichung
- (who)
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Banco de México
- (where)
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Ciudad de México
- (when)
-
2010
- Handle
- Last update
-
10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- García-Verdú, Santiago
- Banco de México
Time of origin
- 2010
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