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Notes on the yield curve

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  • Martin, Ian W. R.
  • Ross, Stephen A.

Abstract

We study the properties of the yield curve under the assumptions that (i) the fixed-income market is complete and (ii) the state vector that drives interest rates follows a finite discrete-time Markov chain. We focus in particular on the relationship between the behavior of the long end of the yield curve and the recovered time discount factor and marginal utilities of a pseudo-representative agent; and on the relationship between the “trappedness” of an economy and the convergence of yields at the long end.

Suggested Citation

  • Martin, Ian W. R. & Ross, Stephen A., 2019. "Notes on the yield curve," Journal of Financial Economics, Elsevier, vol. 134(3), pages 689-702.
    • Handle: RePEc:eee:jfinec:v:134:y:2019:i:3:p:689-702
    DOI: 10.1016/j.jfineco.2019.04.014
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    1. Ian W. R. Martin & Christian Wagner, 2019. "What Is the Expected Return on a Stock?," Journal of Finance, American Finance Association, vol. 74(4), pages 1887-1929, August.
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    6. Lars Peter Hansen & José A. Scheinkman, 2009. "Long-Term Risk: An Operator Approach," Econometrica, Econometric Society, vol. 77(1), pages 177-234, January.
    7. Lukas Kremens & Ian Martin, 2019. "The Quanto Theory of Exchange Rates," American Economic Review, American Economic Association, vol. 109(3), pages 810-843, March.
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    Cited by:

    1. MacDonald, Iain L. & Pienaar, Etienne A.D., 2021. "Fitting a reversible Markov chain by maximum likelihood: Converting an awkwardly constrained optimization problem to an unconstrained one," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 561(C).
    2. Lancia, Francesco & Russo, Alessia & Worrall, Tim S, 2020. "Optimal Sustainable Intergenerational Insurance," CEPR Discussion Papers 15540, C.E.P.R. Discussion Papers.
    3. Borovička, Jaroslav & Stachurski, John, 2021. "Stability of equilibrium asset pricing models: A necessary and sufficient condition," Journal of Economic Theory, Elsevier, vol. 193(C).
    4. Martin, Ian, 2018. "Options and the Gamma Knife," LSE Research Online Documents on Economics 88077, London School of Economics and Political Science, LSE Library.
    5. Jensen, Christian Skov & Lando, David & Pedersen, Lasse Heje, 2019. "Generalized recovery," Journal of Financial Economics, Elsevier, vol. 133(1), pages 154-174.
    6. Narayana R. Kocherlakota, 2023. "Infinite Debt Rollover in Stochastic Economies," Econometrica, Econometric Society, vol. 91(5), pages 1629-1658, September.
    7. Hansen, Stephen & McMahon, Michael & Tong, Matthew, 2019. "The long-run information effect of central bank communication," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 185-202.

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    More about this item

    Keywords

    Yield curve; Term structure; Recovery theorem; Traps; Cheeger inequality; Eigenvalue gap;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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