A preferred-habitat model of the term structure of interest rates

Dimitri Vayanos and Jean-Luc Vila

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We model the term structure of interest rates as resulting from the interaction between investor clienteles with preferences for specific maturities and risk-averse arbitrageurs. Because arbitrageurs are risk averse, shocks to clienteles’ demand for bonds affect the term structure— and constitute an additional determinant of bond prices to current and expected future short rates. At the same time, because arbitrageurs render the term structure arbitrage-free, demand effects satisfy no-arbitrage restrictions and can be quite different from the underlying shocks. We show that the preferred-habitat view of the term structure generates a rich set of implications for bond risk premia, the effects of demand shocks and of shocks to short-rate expectations, the economic role of carry trades, and the transmission of monetary policy.

JEL-codes: E40 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2009-11-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (433)

Downloads: (external link)
http://eprints.lse.ac.uk/29308/ Open access version. (application/pdf)

Related works:
Journal Article: A Preferred‐Habitat Model of the Term Structure of Interest Rates (2021)
Working Paper: A preferred-habitat model of the term structure of interest rates (2021)
Working Paper: A Preferred-Habitat Model of the Term Structure of Interest Rates (2009)
Working Paper: A Preferred-Habitat Model of the Term Structure of Interest Rates (2009)
Working Paper: A Preferred-Habitat Model of the Term Structure of Interest Rates (2009)
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:ehl:lserod:29308

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().