Inflation, Endogenous Market Segmentation and the Term Structure of Interest Rates

Casper de Vries and Xuedong Wang
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Xuedong Wang: Erasmus University Rotterdam, the Netherlands

No 15-066/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The term structure of interest rates does not adhere to the expectations hypothesis, possibly due to a risk premium. We consider the implications of a risk premium that arises from endogenous market segmentation driven by variable inflation rates. In the absence of autocorrelation in inflation, the risk premium is constant. If inflation is correlated, however, the risk premium becomes time varying and we can rationalize the failure of the expectations hypothesis. Indirect empirical tests of the model’s implications are provided.

Keywords: Expectations hypothesis; Term structure; Time-Varying Risk Premia; Segmented markets; Inflation (search for similar items in EconPapers)
JEL-codes: E43 G12 (search for similar items in EconPapers)
Date: 2015-05-29
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: Inflation, Endogenous Market Segmentation and the Term Structure of Interest Rates (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20150066

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