Journal of Financial Economics2013-09-05 2:57 AM

A production-based model for the term structure

Abstract This paper considers the term structure of interest rates implied by a production-based asset pricing model in which the fundamental drivers are investment in equipment and structures as well as 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.

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Journal of Financial Economics

The Journal of Financial Economics or JFE is a peer-reviewed academic journal covering theoretical and empirical topics in financial economics. Together with the Journal of Finance and the Review of Financial Studies, it is considered to be among the top three finance journals.

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