The Term Structure of Interest Rates in a Partially Observable Economy

David Feldman

Journal of Finance, 1989, vol. 44, issue 3, 789-812

Abstract: This paper investigates the term structure of interest rates in a multiperiod production and exchange economy with incomplete information. Unable to observe their stochastic investment opportunities, investors engage in dynamic Bayesian inference. This results in the endogenous identification of a more complex production function which generates a richer term structure, resembling the one that actual market prices imply. In addition, this paper introduces a characteristic function of the term structure and demonstrates that, in contrast with a fully observable economy, the widely investigated expectations hypothesis holds true only if interest rates are nonstochastic.

Date: 1989
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https://doi.org/10.1111/j.1540-6261.1989.tb04391.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:44:y:1989:i:3:p:789-812

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