A Preferred-Habitat Model of the Term Structure of Interest Rates

Dimitri Vayanos and ,

No 7547, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We model the term structure of interest rates as resulting from the interaction between investor clienteles with preferences for specific maturities and risk-averse arbitrageurs. Because arbitrageurs are risk averse, shocks to clienteles' demand for bonds affect the term structure---and constitute an additional determinant of bond prices to current and expected future short rates. At the same time, because arbitrageurs render the term structure arbitrage-free, demand effects satisfy no-arbitrage restrictions and can be quite different from the underlying shocks. We show that the preferred-habitat view of the term structure generates a rich set of implications for bond risk premia, the effects of demand shocks and of shocks to short-rate expectations, the economic role of carry trades, and the transmission of monetary policy.

Keywords: Bond risk premia; Carry trades; Limited arbitrage; Preferred habitat; Term structure of interest rates (search for similar items in EconPapers)
JEL-codes: E4 E5 G1 (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (444)

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Related works:
Working Paper: A preferred-habitat model of the term structure of interest rates (2021)
Working Paper: A preferred-habitat model of the term structure of interest rates (2009)
Working Paper: A Preferred-Habitat Model of the Term Structure of Interest Rates (2009)
Working Paper: A Preferred-Habitat Model of the Term Structure of Interest Rates (2009)
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