A Preferred‐Habitat Model of the Term Structure of Interest Rates

Dimitri Vayanos; Jean-Luc Vila

doi:10.3982/ecta17440

journal article Open Access Jan 01, 2021

A Preferred‐Habitat Model of the Term Structure of Interest Rates

Dimitri Vayanos Jean-Luc Vila

Econometrica Vol. 89 No. 1 pp. 77-112 · JSTOR

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Abstract

We model the term structure of interest rates that results from the interaction between investors with preferences for specific maturities and risk‐averse arbitrageurs. Shocks to the short rate are transmitted to long rates through arbitrageurs' carry trades. Arbitrageurs earn rents from transmitting the shocks through bond risk premia that relate positively to the slope of the term structure. When the short rate is the only risk factor, changes in investor demand have the same relative effect on interest rates across maturities regardless of the maturities where they originate. When investor demand is also stochastic, demand effects become more localized. A calibration indicates that long rates underreact to forward‐guidance announcements about short rates. Large‐scale asset purchases can be more effective in moving long rates, especially if they are concentrated at long maturities.

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A Preferred‐Habitat Model of the Term Structure of Interest Rates

Dimitri Vayanos, Jean-Luc Vila · 2021

Econometrica

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311

Citations

73

References

Details

Published: Jan 01, 2021
Vol/Issue: 89(1)
Pages: 77-112
License: View

Authors

D

Dimitri Vayanos

Department of Finance, London School of Economics

J

Jean-Luc Vila

Capula Investment Management

Cite This Article

Dimitri Vayanos, Jean-Luc Vila (2021). A Preferred‐Habitat Model of the Term Structure of Interest Rates. Econometrica, 89(1), 77-112. https://doi.org/10.3982/ecta17440

A Preferred‐Habitat Model of the Term Structure of Interest Rates

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