Discounting the distant future: What do historical bond prices imply about the long term discount rate?

J. Farmer, John Geanakoplos, Matteo Richiardi, Miquel Montero, Josep Perell\'o and Jaume Masoliver

Papers from arXiv.org

Abstract: We present a thorough empirical study on real interest rates by also including risk aversion through the introduction of the market price of risk. With the view of complex systems science and its multidisciplinary approach, we use the theory of bond pricing to study the long term discount rate. Century-long historical records of 3 month bonds, 10 year bonds, and inflation allow us to estimate real interest rates for the UK and the US. Real interest rates are negative about a third of the time and the real yield curves are inverted more than a third of the time, sometimes by substantial amounts. This rules out most of the standard bond pricing models, which are designed for nominal rates that are assumed to be positive. We therefore use the Ornstein-Uhlenbeck model which allows negative rates and gives a good match to inversions of the yield curve. We derive the discount function using the method of Fourier transforms and fit it to the historical data. The estimated long term discount rate is $1.7$ \% for the UK and $2.2$ \% for the US. The value of $1.4$ \% used by Stern is less than a standard deviation from our estimated long run return rate for the UK, and less than two standard deviations of the estimated value for the US. All of this once more reinforces the support for immediate and substantial spending to combat climate change.

Date: 2023-12
New Economics Papers: this item is included in nep-fdg and nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://arxiv.org/pdf/2312.17157 Latest version (application/pdf)

Related works:
Journal Article: Discounting the Distant Future: What Do Historical Bond Prices Imply about the Long-Term Discount Rate? (2024)
Working Paper: Discounting the distant future: What do historical bond prices imply about the long term discount rate? (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2312.17157

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().