Equilibrium Positive Interest Rates: A Unified View

Posted: 9 Mar 2001

See all articles by Paul Glasserman

Paul Glasserman

Columbia Business School

Yan Jin

Goldman Sachs Asset Management

Abstract

This article develops precise connections among two general approaches to building interest rate models: a general equilibrium approach using a pricing kernel and the Heath, Jarrow, and Morton framework based on specifying forward rate volatilities and the market price of risk. The connections exploit the observation that a pricing kernel is uniquely determined by its drift. Through these connections we provide, for any arbitrage-free term structure model, a representative-consumer real production economy supporting that term structure model in equilibrium. We put particular emphasis on models in which interest rates remain positive. By modeling the dynamics of the drift of the pricing kernel, we construct a new family of Markovian-positive interest rate models.

Suggested Citation

Glasserman, Paul and Jin, Yan, Equilibrium Positive Interest Rates: A Unified View. Available at SSRN: https://ssrn.com/abstract=253081

Paul Glasserman

Columbia Business School ( email )

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Yan Jin (Contact Author)

Goldman Sachs Asset Management ( email )

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New York, NY 10005
United States

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