Supply and Demand and the Term Structure of Interest Rates

Robin Greenwood, Samuel Hanson and Dimitri Vayanos

No 31879, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We survey the growing literature emphasizing the role that supply-and-demand forces play in shaping the term structure of interest rates. Our starting point is the Vayanos and Vila (2009, 2021) model of the term structure of default-free bond yields, which we present in both discrete and continuous time. The key friction in the model is that the bond market is partially segmented from other financial markets: the prices of short-rate and bond supply risk are set by specialized bond arbitrageurs who must absorb shocks to the supply and demand for bonds from other “preferred-habitat” agents. We discuss extensions of this model in the context of default-free bonds and other asset classes.

JEL-codes: E4 E40 E49 E52 E7 G02 G1 G10 G11 G12 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-fdg and nep-mon
Note: AP IFM ME
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Citations: View citations in EconPapers (1)

Published as Robin Greenwood & Samuel Hanson & Dimitri Vayanos, 2024. "Supply and Demand and the Term Structure of Interest Rates," Annual Review of Financial Economics, .

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Working Paper: Supply and demand and the term structure of interest rates (2024)
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