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The Term Structure of Interest Rates: Departures from Time-Separable Expected Utility

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  • Allan W. Gregory
  • Graham M. Voss

Abstract

This paper assesses the ability of general-equilibrium models of asset pricing using two recently developed sets of preferences to account quantitatively for the observed variability in the Canadian term structure of interest rates. The preference structures are nonexpected utility and habit persistence associated with Epstein and Zin (1989) and Constantinides (1990), respectively. The framework adopted follows Backus, Gregory, and Zin (1989), where a numerical version of the theory is specified and empirical features of the artificial economy are compared with actual data. Neither preference structure is able to mimic satisfactorily the magnitude or the variability of the risk premiums.

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  • Allan W. Gregory & Graham M. Voss, 1991. "The Term Structure of Interest Rates: Departures from Time-Separable Expected Utility," Canadian Journal of Economics, Canadian Economics Association, vol. 24(4), pages 923-939, November.
    • Handle: RePEc:cje:issued:v:24:y:1991:i:4:p:923-39
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    Cited by:

    1. Francisco Ruge‐Murcia, 2017. "Skewness Risk and Bond Prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(2), pages 379-400, March.
    2. René Garcia & Richard Luger, 2012. "Risk aversion, intertemporal substitution, and the term structure of interest rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(6), pages 1013-1036, September.
    3. Balázs Romhányi, 2005. "A learning hypothesis of the term structure of interest rates," Macroeconomics 0503001, University Library of Munich, Germany.

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