Incomplete markets, liquidation risk, and the term structure of interest rates - HAL Accéder directement au contenu
Pré-publication, Document de travail Année : 2013

Incomplete markets, liquidation risk, and the term structure of interest rates

Résumé

We analyse the term structure of interest rates in a general equilibrium model with incomplete markets, borrowing constraint, and positive net supply of government bonds. Uninsured idiosyncratic shocks generate bond trades, while aggregate shocks cause fluctuations in the trading price of bonds. Long bonds command a "liquidation risk premium" over short bonds, because they may have to be liquidated before maturity following a bad idiosyncratic shock precisely when their resale value is low due to the simultaneous occurrence of a bad aggregate shock. Our framework endogenously generates limited cross-sectional wealth heterogeneity among the agents (despite the presence of uninsured idiosyncratic shocks), which allows us to characterise analytically the shape of the entire yield curve, including the yields on bonds of arbitrarily long maturities. Agents’ desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms imply that a greater bond supply raises the level of the yield curve, while an increase in the relative supply of long bonds raises its slope.
Fichier principal
Vignette du fichier
Cahier_2013_14_2_.pdf ( 366.92 Ko ) Télécharger
Origine : Fichiers produits par l'(les) auteur(s)
Loading...

Dates et versions

hal-00843147, version 1 (10-07-2013)

Identifiants

  • HAL Id : hal-00843147 , version 1

Citer

Edouard Challe, François Le Grand, Xavier Ragot. Incomplete markets, liquidation risk, and the term structure of interest rates. 2013. ⟨hal-00843147⟩
381 Consultations
444 Téléchargements
Dernière date de mise à jour le 20/04/2024
comment ces indicateurs sont-ils produits

Partager

Gmail Facebook Twitter LinkedIn Plus