Habit Formation and Macroeconomic Models of the Term Structure of Interest Rates

Buraschi, Andrea; Jiltsov, Alexei

doi:10.1111/j.1540-6261.2007.01299.x

Cited by 146 publications

(74 citation statements)

References 84 publications

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“…In Wachter (2006), Buraschi and Jiltsov (2007) and Lettau and Wachter (2009), a representative agent has habit formation, and periods of low consumption are associated with high short rates and bond risk premia. The time-variation in premia generates a positive relationship with slope, but in contrast to our model premia are always positive.…”

Section: Introductionmentioning

confidence: 99%

A Preferred-Habitat Model of the Term Structure of Interest Rates

2009

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We model the term structure of interest rates as resulting from the interaction between investor clienteles with preferences for specific maturities and risk-averse arbitrageurs. Because arbitrageurs are risk averse, shocks to clienteles' demand for bonds affect the term structureand constitute an additional determinant of bond prices to current and expected future short rates. At the same time, because arbitrageurs render the term structure arbitrage-free, demand effects satisfy no-arbitrage restrictions and can be quite different from the underlying shocks. We show that the preferred-habitat view of the term structure generates a rich set of implications for bond risk premia, the effects of demand shocks and of shocks to short-rate expectations, the economic role of carry trades, and the transmission of monetary policy.

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Section: Introductionmentioning

confidence: 99%

A Preferred-Habitat Model of the Term Structure of Interest Rates

2009

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“…This paper adds to a large literature that uses habit formation to explain asset prices in closed and open economies (see, e.g., Sundaresan, 1989, Abel 1990, Constantinides 1990, Detemple and Zapatero 1991, Ferson and Constantinides 1991, Heaton 1995, Jermann 1998, Boldrin, Christiano, and Fisher 2001, Chan and Kogan 2002, Menzly, Santos, and Veronesi 2004, Santos and Veronesi 2010and Buraschi and Jiltsov 2007. The model I develop adapts the Campbell and Cochrane (1999) habit specification to an open-economy setting.…”

Section: Related Literaturementioning

confidence: 99%

Hot Money and External Adjustment

Evans

2013

SSRN Journal

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This paper studies the behavior of international capital flows driven by the portfolio reallocation decisions of international investors; so-called hot money. I develop an open economy model with endowment and preference shocks that can account for the empirical behavior of real exchange rates, interest rates and consumption in the U.S. and Europe. The model includes financial frictions that impede international risk-sharing and hot money flows driven by optimal portfolio reallocations. My analysis reveals that hot money flows are an economically insignificant part of the international adjustment process following standard (temporary) endowment shocks. In contrast, preference shocks that change investors' risk aversion produce sizable hot money flows. These shocks also produce sizable variations in the expected return differentials on foreign assets and liabilities that allow for external adjustment via the valuation channel. Consistent with the model's predictions, I show that forecasts of future return differentials contributed most to the volatility of the U.S. net foreign asset position in the post Bretton-Woods era. Together, these findings indicate that hot money flows are an integral and empirically important part of the external adjustment process.

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“…Since the nominal pricing kernel is given by the real pricing kernel, deflated by the inflation, the assumption that the central bank controls the nominal short rate implies a restriction on the (endogenous) inflation dynamic: the inflation process can be solved for by requiring consistency between the policy rule of the central bank and the Euler equation for the nominal short rate. For example, Kung (2014) and Gallmeyer, Hollifield, Palomino, and Zin (2007b) study Taylor rules with representative agents having Epstein-Zin preferences, while Buraschi and Jiltsov (2007) or Campbell, Pflueger, and Viceira (2013) combine habit formation and monetary policy. The general conclusion from this literature is that monetary policy and endogenous inflation dynamics help resolve many salient puzzles of the term structure with respect to models that solve for short rates in the absence of a policy rule.…”

Section: A Related Literaturementioning

confidence: 99%

Monetary Policy and Treasury Risk Premia

2014

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This paper investigates the role of monetary policy as a source of time-varying priced risk in bond markets. We use individual agents forecasts of Federal Funds, GDP and inflation to construct an empirical proxy for policy shocks from the residuals of Taylor rule regressions. Key to our analysis is a distinction between (pro-cyclical) target rate shocks and (counter-cyclical) path shocks. We show that path shocks account for between 10% − 15% of the variance of one-year expected excess returns on bonds with maturities 2 − 5 years and are also priced in the cross-section of equity returns.JEL classification: G12, E43, E52

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Habit Formation and Macroeconomic Models of the Term Structure of Interest Rates

Cited by 146 publications

References 84 publications

A Preferred-Habitat Model of the Term Structure of Interest Rates

A Preferred-Habitat Model of the Term Structure of Interest Rates

Hot Money and External Adjustment

Monetary Policy and Treasury Risk Premia

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