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Pension Funds and the Yield Curve: The Role of Preference for Maturity

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  • Rodrigo Alfaro
  • Mauricio Calani

Abstract

What is the effect on the yield curve of an increase in market participation of a large institutional investor? To answer this question, we introduce a simplification of the model with heterogeneity of preference for maturity first proposed by Vayanos and Vila (2009). We show that our simplification entails little loss in fit and interpretation, while it provides greater simplicity and tractability. We take Chilean data of the sovereign fixed income market, and conclude that; for an additional one percent of higher market share of Pension Funds Administrators in said market, interest rates of the 10-year (5-year) associated instruments, are reduced by 6bp (4bp).

Suggested Citation

  • Rodrigo Alfaro & Mauricio Calani, 2018. "Pension Funds and the Yield Curve: The Role of Preference for Maturity," Working Papers Central Bank of Chile 821, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:821
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    References listed on IDEAS

    as
    1. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    2. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
    3. Iryna Kaminska & Gabriele Zinna, 2020. "Official Demand for U.S. Debt: Implications for U.S. Real Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 323-364, March.
    4. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
    5. David Kohn, 2015. "Addicted to Debt: Foreign Purchases of U.S. Treasuries and the Term-Premium," Department of Economics Working Papers 2015_1, Universidad Torcuato Di Tella.
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