Preferred - Habitat Investors and the US Term Structure of Real Rates

65 Pages Posted: 28 Jul 2011

See all articles by Iryna Kaminska

Iryna Kaminska

Bank of England

Dimitri Vayanos

London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Gabriele Zinna

Bank of Italy

Date Written: July 28, 2011

Abstract

We estimate structurally a model of the term structure of interest rates that is consistent with no arbitrage but allows for demand pressures. The term structure in our model is determined through the interaction of risk-averse arbitrageurs and preferred-habitat investors with preferences for specific maturities. The model is estimated on US real rates during the 2000s and allows for two factors: one corresponding to the short rate and one to preferred - habitat demand. We find that the puzzling drop in long rates during 2004-05 (Greenspan conundrum) is driven by the demand factor. International reserves, foreign official holdings of longer-term US Treasuries may all be proxies for the preferred - habitat demand factor. For example, foreign purchases in the year to July 2004 appear to have lowered the ten-year rate by about 100 basis points. Foreign purchases have larger effects following periods when arbitrageurs have lost money.

Keywords: foreign reserves, term structure of interest rates, term premium, MCMC

JEL Classification: F31, G10

Suggested Citation

Kaminska, Iryna and Vayanos, Dimitri and Zinna, Gabriele, Preferred - Habitat Investors and the US Term Structure of Real Rates (July 28, 2011). Bank of England Working Paper No. 435. Available at SSRN: https://ssrn.com/abstract=1898069 or http://dx.doi.org/10.2139/ssrn.1898069

Iryna Kaminska (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Dimitri Vayanos

London School of Economics ( email )

A350
Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)

Center for Economic Policy Research (CEPR)

London
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gabriele Zinna

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://gabrielezinna.github.io/

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