An equilibrium model of the term structures of bonds and equities

Hideyuki Takamizawa

International Review of Financial Analysis, 2022, vol. 84, issue C

Abstract: We propose an equilibrium model of the term structures of bonds and equities, which has a similar descriptive ability to the reduced form model proposed by Lettau and Wachter (2011) (LW), and yet offers economic implications about preferences and consumption dynamics. The key is to let the parameters of recursive utility depend on state variables of the economy and replicate the stochastic discount factor specified by LW. We show that the model can explain the stylized facts about the various term structures, which, however, requires a high risk aversion, a high consumption volatility, or both. This tension can be alleviated by changing the parameters of the state-dependent preferences in our model.

Keywords: Term structure; Interest rate; Dividend strip; Risk premium; Sharpe ratio; Recursive utility; State-dependent preference (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: An Equilibrium Model of Term Structures of Bonds and Equities (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:84:y:2022:i:c:s1057521922003064

DOI: 10.1016/j.irfa.2022.102356

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