Incomplete markets, liquidation risk, and the term structure of interest rates
Edouard Challe
- Fonction : Auteur
- PersonId : 1099429
Xavier Ragot
- Fonction : Auteur
- PersonId : 11514
- IdHAL : xavier-ragot
- ORCID : 0000-0002-7874-8508
- IdRef : 06902104X
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. Agentsʼ desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms implies 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.
Domaines
Economies et financesFormat du dépôt | Notice |
---|---|
Type de dépôt | Article dans une revue |
Titre |
en
Incomplete markets, liquidation risk, and the term structure of interest rates
|
Résumé |
en
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. Agentsʼ desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms implies 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.
|
Auteur(s) |
Edouard Challe
1, 2
, François Le Grand
3, 4
, Xavier Ragot
5, 6
1
X-DEP-ECO -
Département d'Économie de l'École Polytechnique
( 444480 )
- École Polytechnique, 91128 Palaiseau Cedex
- France
2
Banque de france
( 134427 )
- France
3
ETH Zürich -
Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]
( 180925 )
- Hauptgebäude, Rämistrasse 101, 8092 Zürich
- Suisse
4
EM -
EMLyon Business School
( 301362 )
- 23 Avenue Guy de Collongue, 69134 Ecully cedex
- France
5
PSE -
Paris School of Economics
( 301309 )
- 48 boulevard Jourdan 75014 Paris
- France
6
PSE -
Paris-Jourdan Sciences Economiques
( 139754 )
- 48 boulevard Jourdan 75014 Paris
- France
|
Comité de lecture |
Oui
|
Vulgarisation |
Non
|
Langue du document |
Anglais
|
Nom de la revue |
|
Audience |
Non spécifiée
|
Date de publication |
2013-11
|
Volume |
148
|
Numéro |
6
|
Page/Identifiant |
2483-2519
|
Mots-clés (JEL) |
|
Domaine(s) |
|
Financement |
|
Projet(s) ANR |
|
Mots-clés |
en
Incomplete markets, Borrowing constraint, Yield curve
|
DOI | 10.1016/j.jet.2013.10.003 |
Loading...