A Production-Based Model for the Term Structure

Jermann, Urban

A Production-Based Model for the Term Structure

No 18774, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper considers the term structure of interest rates implied by a production-based asset pricing model where the fundamental drivers are investment in equipment and structures, and 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.

JEL-codes: E22 G12 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-mac
Note: AP EFG
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Citations: View citations in EconPapers (18)

Published as Journal of Financial Economics Volume 109, Issue 2, August 2013, Pages 293–306 Cover image A production-based model for the term structure ☆ Urban J. Jermanna, b, ,

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