A Production-Based Model for the Term Structure / Urban Jermann.

By:

Jermann, Urban

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w18774.Publication details: Cambridge, Mass. National Bureau of Economic Research 2013.Description: 1 online resource: illustrations (black and white)Subject(s):

Online resources:

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Abstract: This paper considers the term structure of interest rates implied by a production-based asset pricing model where the fundamental drivers are investment in equipment and structures, and 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.

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February 2013.

This paper considers the term structure of interest rates implied by a production-based asset pricing model where the fundamental drivers are investment in equipment and structures, and 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.