The yield curve: terms of endearment or terms of endowment?

Chris Telmer () and Stanley Zin

GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: By solving an incomplete-markets model of multiperiod bond pricing {\it backwards}, we show that the mean and autocorrelation properties of the term premiums in the yield curve can be a reflection of the temporal distribution of uninsurable income shocks, {\it i.e.}, the term structure of endowments. Moreover, agents can exhibit an equilibrium {\it preferred habitat} in bond maturities in the absence of binding portfolio restrictions.

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