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Structural Models of Interest Rate Determination and Portfolio Behavior in the Corporate and Government Bond Markets

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  • Benjamin M. Friedman
  • V. Vance Roley

Abstract

This paper summarizes some recent work in which we have modeled long-term interest rate determination in an explicit demand-supply context, using multi-equation structural models and directly contrasts such models with unrestricted reduced-form models. Wholly apart from questions of disaggregation and institutional detail, the explicitly structural nature of demand-supply models necessitates additional theoretical constructs beyond those required by unrestricted reduced-form models. Some of these conceptual inputs are already available from established portfolio theory, and others represent objects of current or prospective research. Experience to date with structural models of long-term interest rate determination suggests, however, that the exploitation of the richer theoretical framework yields not only insights about portfolio behavior but, very likely, improved interest rate models as well.

Suggested Citation

  • Benjamin M. Friedman & V. Vance Roley, 1981. "Structural Models of Interest Rate Determination and Portfolio Behavior in the Corporate and Government Bond Markets," NBER Working Papers 0205, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0205
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    References listed on IDEAS

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    3. repec:bla:econom:v:40:y:1973:i:157:p:12-43 is not listed on IDEAS
    4. Friedman, Benjamin M, 1979. "Substitution and Expectation Effects on Long-Term Borrowing Behavior and Long-Term Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(2), pages 131-150, May.
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    6. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    7. Friedman, Benjamin M, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 661-689, August.
    8. MOSSIN, Jan, 1968. "Optimal multiperiod portfolio policies," LIDAM Reprints CORE 19, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Friedman, Benjamin Morton, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Scholarly Articles 4554309, Harvard University Department of Economics.
    10. Paul A. Samuelson, 1970. "The Fundamental Approximation Theorem of Portfolio Analysis in terms of Means, Variances and Higher Moments," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(4), pages 537-542.
    11. Backus, David, et al, 1980. "A Model of U.S. Financial and Nonfinancial Economic Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(2), pages 259-293, Special I.
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    13. Benjamin M. Friedman, 1978. "Who Puts the Inflation Premium Into Nominal Interests Rates?," NBER Working Papers 0231, National Bureau of Economic Research, Inc.
    14. Friedman, Benjamin M, 1978. "Who Puts the Inflation Premium into Nominal Interest Rates?," Journal of Finance, American Finance Association, vol. 33(3), pages 833-845, June.
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