Negative Real Interest Rates

40 Pages Posted: 7 Dec 2014 Last revised: 17 May 2017

See all articles by Jing Chen

Jing Chen

Cardiff University - School of Mathematics

Diandian Ma

Lecturer in Accounting

Xiaojing Song

Lecturer of Accounting & Finance

Mark J. Tippett

Loughborough University - Business School; University of Exeter Business School

Date Written: October 6, 2014

Abstract

We develop the Cox, Ingersoll and Ross (1985b) “technological uncertainty variable” in terms of a skewed Student “t” probability density with mean reverting sample paths and time varying volatility so that it can accommodate negative real interest rates. The Fokker-Planck equation is then used to determine the conditional moments of the instantaneous real interest rate and the mean and variance of the accumulated real interest rate. We also determine the price of a pure discount bond when there is a non-trivial probability that real interest rates may go negative.

Keywords: Fokker-Planck equation, General equilibrium, Mean reversion, Real interest rate

JEL Classification: C61, C63, E43

Suggested Citation

Chen, Jing and Ma, Diandian and Song, Xiaojing and Tippett, Mark J., Negative Real Interest Rates (October 6, 2014). Available at SSRN: https://ssrn.com/abstract=2534813 or http://dx.doi.org/10.2139/ssrn.2534813

Jing Chen (Contact Author)

Cardiff University - School of Mathematics ( email )

Senghennydd Road
Cardiff, CF24 4AG
United Kingdom

Diandian Ma

Lecturer in Accounting ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Xiaojing Song

Lecturer of Accounting & Finance ( email )

Norwich
NR4 7TJ
United Kingdom

Mark J. Tippett

Loughborough University - Business School ( email )

Ashby Road
Loughborough
Nottingham NG1 4BU, LE11 3TU
Great Britain

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

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