Incomplete markets and the yield curve

Xavier Ragot, Francois Le Grand and Edouard Challe
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Francois Le Grand: PSE
Edouard Challe: CNRS

No 715, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: The bond supply affects the yield curve through a wealth effect. We prove notably that a larger volume of titles shifts the level of the yield curve downward and increases its slope. Finally, credit constraints allow idiosyncratic and aggregate risks to interact and thus make interest rates more volatile.

Date: 2007
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