Structural Models of Interest Rate Determination and Portfolio Behavior in the Corporate and Government Bond Markets

11 Pages Posted: 4 Jul 2004 Last revised: 26 Jul 2010

See all articles by Benjamin M. Friedman

Benjamin M. Friedman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

V. Vance Roley

University of Hawaii - Shidler College of Business; National Bureau of Economic Research (NBER)

Date Written: 1981

Abstract

This paper summarizes some recent work in which we have modeled long-term interest rate determination in an explicit demand-supply context, using multi-equation structural models and directly contrasts such models with unrestricted reduced-form models. Wholly apart from questions of disaggregation and institutional detail, the explicitly structural nature of demand-supply models necessitates additional theoretical constructs beyond those required by unrestricted reduced-form models. Some of these conceptual inputs are already available from established portfolio theory, and others represent objects of current or prospective research. Experience to date with structural models of long-term interest rate determination suggests, however, that the exploitation of the richer theoretical framework yields not only insights about portfolio behavior but, very likely, improved interest rate models as well.

Suggested Citation

Friedman, Benjamin M. and Roley, V. Vance, Structural Models of Interest Rate Determination and Portfolio Behavior in the Corporate and Government Bond Markets (1981). NBER Working Paper No. w0205. Available at SSRN: https://ssrn.com/abstract=226652

Benjamin M. Friedman (Contact Author)

Harvard University - Department of Economics ( email )

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V. Vance Roley

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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