Real term premia in consumption-based models

  • Can consumption-based mechanisms generate positive and time-varying real term premia as we see in the data? I show that only models with time-varying risk aversion or models with high consumption risk can independently produce these patterns. The latter explanation has not been analysed before with respect to real term premia, and it relies on a small group of investors exposed to high consumption risk. Additionally, it can give rise to a “consumption-based arbitrageur” story of term premia. In relation to preferences, I consider models with both time-separable and recursive utility functions. Specifically for recursive utility, I introduce a novel perturbation solution method in terms of the intertemporal elasticity of substitution. This approach has not been used before in such models, it is easy to implement, and it allows a wide range of values for the parameter of intertemporal elasticity of substitution.

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Metadaten
Author:Errikos Melissinos
URN:urn:nbn:de:hebis:30:3-715566
URL:https://ssrn.com/abstract=4582708
DOI:https://doi.org/10.2139/ssrn.4582708
Series (Serial Number):SAFE working paper (413)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2023
Year of first Publication:2023
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2024/01/15
Tag:consumption-based models; habit; high consumption volatility; limited arbitrage; long-run risk; recursive utility; solution methods; term premia
Edition:23 November 2023
Page Number:105
HeBIS-PPN:515424684
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C6 Mathematical Methods and Programming / C65 Miscellaneous Mathematical Tools
E Macroeconomics and Monetary Economics / E4 Money and Interest Rates / E43 Determination of Interest Rates; Term Structure of Interest Rates
G Financial Economics / G1 General Financial Markets / G12 Asset Pricing; Trading volume; Bond Interest Rates
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht