The Term Structure of Interest Rates: Departures from Time-Separable Expected Utility

Allan Gregory and Graham Voss

Canadian Journal of Economics, 1991, vol. 24, issue 4, 923-39

Abstract: This paper assesses the ability of general-equilibrium models of asset pricing using two recently developed sets of preferences to account quantitatively for the observed variability in the Canadian term structure of interest rates. The preference structures are nonexpected utility and habit persistence associated with Epstein and Zin (1989) and Constantinides (1990), respectively. The framework adopted follows Backus, Gregory, and Zin (1989), where a numerical version of the theory is specified and empirical features of the artificial economy are compared with actual data. Neither preference structure is able to mimic satisfactorily the magnitude or the variability of the risk premiums.

Date: 1991
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Working Paper: The Term Structure of Interest Rates: Departures from Time-Separable Expected Utility (1990)
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