The Term Structure of Interest Rates in a Pure Exchange Economy with Heterogeneous Investors
42 Pages Posted: 11 Jun 2000 Last revised: 1 Sep 2010
Date Written: July 1995
This paper presents an equilibrium model of the term structure of interest rates when investors have heterogeneous preferences. The basic model considers a pure exchange economy of two classes of investors with different (but constant) relative risk-aversion and gives closed-form solutions to bond prices. We use the model to examine the effect of preference heterogeneity on the behavior of bond yields. Extensions to cases of more than two investors are also considered.
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