Working Paper: CEPR ID: DP13176
Authors: Ian Martin; Stephen Ross
Abstract: We study the properties of the yield curve under the assumptions that (i) the fixed-income market is complete and (ii) the state vector that drives interest rates follows a finite discrete-time Markov chain. We focus in particular on the relationship between the behavior of the long end of the yield curve and the recovered time discount factor and marginal utilities of a pseudo-representative agent; and on the relationship between the “trappedness” of an economy and the convergence of yields at the long end.
Keywords: yield curve; term structure; recovery theorem; traps; Cheeger inequality; eigenvalue gap
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| yield curve (E43) | time preference rate of the pseudo representative agent (D15) |
| option prices (G13) | expected excess return on the long bond (G12) |
| long bond characteristics (E43) | expected return (G17) |
| structure of the economy (L16) | behavior of the yield curve (E43) |