State Uncertainty Aversion and the Term Structure of Interest Rates
August 14, 2012
EFA 2009 Bergen Meetings Paper
Asset pricing model have a hard time matching even the sign of the premium observed in the term-structure of interest rates. This paper shows how investors' doubts about the state of the business cycle produces a premium that increases with maturity, provided investors not only dislike risk but also uncertainty about the current state of the economy. The model used can account quantitatively for the empirical term premium in the U.S. data and it correctly predicts the flattening of the real yield curve observed during the great moderation.
Number of Pages in PDF File: 54
Keywords: Interest rates, Term premium, Uncertainty, Robustness
JEL Classification: E43, G12working papers series
Date posted: March 17, 2008 ; Last revised: August 14, 2012
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