The Real Term Premium in a Stationary Economy with Segmented Asset Markets

YiLi Chien and Junsang Lee

Review, 2019, vol. 101, issue 2, 115-134

Abstract: This article proposes a general equilibrium model to explain the positive and sizable term premia implied by the data. The authors introduce a slow mean-reverting process of consumption growth and a segmented asset-market mechanism with heterogeneous trading technologies into an otherwise standard heterogeneous agent general equilibrium model. First, the slow mean-reverting consumption growth process implies that the expected consumption growth rate is only slightly countercyclical and the process can exhibit near-zero first-order autocorrelation, as observed in the data. This slight countercyclicality suggests that long-term bonds are risky, and hence the term premia should be positive. Second, the segmented asset-market mechanism amplifies the magnitude of the term premia because aggregate risk is highly concentrated in a small fraction of marginal traders who demand high compensation for taking risk. For sensitivity analysis, the role of each assumption is further investigated by removing each factor one at a time.

JEL-codes: E30 G11 G12 (search for similar items in EconPapers)
Date: 2019
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Working Paper: The Real Term Premium in a Stationary Economy with Segmented Asset Markets (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlrv:00117

DOI: 10.20955/r.101.115-34

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