N ° 2007 - 49 Incomplete markets , liquidation risk and the term structure of interest rates
نویسندگان
چکیده
We construct a general equilibrium model with incomplete markets and borrowing constraints, in order to study the term structure of real interest rates. Agents are subject to both aggregate and idiosyncratic income shocks, which latter may force them into early portfolio liquidation whilst in recession. We derive a closed-form equilibrium with limited agents’ heterogeneity (despite market incompleteness), which allows us to derive analytical expressions for bond prices and returns at any maturity. The desirability of bonds as liquidity makes the aggregate bond demand downward-sloping. One consequence of this is that a larger bond supply raises both the level and the slope of the yield curve.
منابع مشابه
Incomplete markets, liquidation risk, and the term structure of interest rates
We analyse the term structure of interest rates in a general equilibrium model with incomplete markets, borrowing constraint, and positive net supply of government bonds. Uninsured idiosyncratic shocks generate bond trades, while aggregate shocks cause fluctuations in the trading price of bonds. Long bonds command a “liquidation risk premium”over short bonds, because they may have to be liquida...
متن کاملIncomplete Markets and the Yield Curve
We present a general equilibrium model with incomplete markets and borrowing constraints to study the interest rate term structure. Agents face both an aggregate risk and an idiosyncratic risk of unemployment, which is not insurable. We derive analytical expressions for the bond prices, whatever their maturities. We also exhibit the e ects of credit constraints on the whole price structure. The...
متن کاملThe effect of interest rates on facilities granted by the country's banks in accelerating Iran's economic growth
The economic literature has scrutinized financial development from various dimensions; In this regard, what is important about bank-based financial systems is the distribution of facilities granted between economic sectors. In fact, in non-competitive markets, with the feature of incomplete and incomplete information, any distribution of facilities based on maximizing the profits of banks does ...
متن کاملOptimal Maturity of Government Debt with Incomplete Markets
In this paper we show how risk free bonds of di¤erent maturities can be used to replace state contingent debt in a general equilibrium dynamic optimal taxation problem. In particular, we show that if the state of the economy can only take a ...nite number N of values each period, then the government can support the complete markets Ramsey allocation issuing bonds of J ̧ N di¤erent maturities. W...
متن کاملThe Interactions between the Lending Rates, Deposit Rates and Money Market Rates
T he present paper investigates the impact of the financial crisis on the interaction between the lending rates, deposit rates and money market rates through the process of retail bank interest rate pass-through in the countries of the Euro area. Among our findings is the heterogeneity of bank rate adjustments across sectors, loans and deposits. That was mainly marked during the pre-...
متن کامل