Working Paper: NBER ID: w18774
Authors: Urban Jermann
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.
Keywords: term structure of interest rates; production-based asset pricing; investment; inflation; bond risk premiums
JEL Codes: E22; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital depreciation rates (D25) | interest rate dynamics (E43) |
| investment (G31) | interest rates (E43) |
| investment and capital ratios (G31) | bond returns (G12) |
| Fama-Bliss regressions of excess returns on forward premiums (C29) | bond returns (G12) |
| inflation (E31) | bond returns (G12) |
| real investment growth (E22) | bond returns (G12) |