The Real Term Premium in a Stationary Economy with Segmented Asset Markets

27 Pages Posted: 6 Dec 2019

See all articles by YiLi Chien

YiLi Chien

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Junsang Lee

Sungkyunkwan University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

This article proposes a general equilibrium model to explain the positive and sizable term premia implied by the data. The authors introduce a slow mean-reverting process of consumption growth and a segmented asset-market mechanism with heterogeneous trading technologies into an otherwise standard heterogeneous agent general equilibrium model. First, the slow mean-reverting consumption growth process implies that the expected consumption growth rate is only slightly countercyclical and the process can exhibit near-zero first-order autocorrelation, as observed in the data. This slight countercyclicality suggests that long-term bonds are risky, and hence the term premia should be positive. Second, the segmented asset-market mechanism amplifies the magnitude of the term premia because aggregate risk is highly concentrated in a small fraction of marginal traders who demand high compensation for taking risk. For sensitivity analysis, the role of each assumption is further investigated by removing each factor one at a time.

JEL Classification: E30, G11, G12

Suggested Citation

Chien, YiLi and Lee, Junsang, The Real Term Premium in a Stationary Economy with Segmented Asset Markets (2019). Review, Vol. 101, Issue 2, pp. 115-134, 2019, Available at SSRN: https://ssrn.com/abstract=3494160 or http://dx.doi.org/10.20955/r.101.115-34

YiLi Chien (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Junsang Lee

Sungkyunkwan University - Department of Economics ( email )

110-745 Seoul
Korea

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