A production-based model for the term structure

Urban Jermann

Journal of Financial Economics, 2013, vol. 109, issue 2, 293-306

Abstract: This paper considers the term structure of interest rates implied by a production-based asset pricing model in which the fundamental drivers are investment in equipment and structures as well as inflation. The model matches the average yield curve up to five-year maturity almost perfectly. Longer term yields are roughly as volatile as in the data. The model also generates time-varying bond risk premiums. In particular, when running Fama-Bliss regressions of excess returns on forward premiums, the model produces slope coefficients of roughly half the size of the empirical counterparts. Closed-form expressions highlight the importance of the capital depreciation rates for interest rate dynamics.

Keywords: Production-based asset pricing; Term structure (search for similar items in EconPapers)
JEL-codes: E23 G12 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:109:y:2013:i:2:p:293-306

DOI: 10.1016/j.jfineco.2013.03.001

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