An Equilibrium Model of Term Structures of Bonds and Equities

This study proposes an equilibrium model of term structures of bonds and equities, which has a similar descriptive ability to a reduced-form model proposed by Lettau and Wachter (LW) (J. Financial Economics, 2011), and yet offers economic implications about preferences and consumption dynamics. The ability is obtained by letting parameters of recursive utility depend on state variables of the economy. The model is calibrated by matching it with the LW model, showing that it can produce the term structure of real interest rates with either a positive or negative slope and the term structure of dividend risk premiums with a negative slope, both of which stand as challenges to any pricing models. It also shows that while an implied behavior of state-dependent time preference is reasonable, modifications of parameter values and cash flow processes are necessary for state-dependent risk aversion to behave reasonably.

Hitotsubashi University Center for Financial Research

2018-07-01

英語(eng)

technical report（テクニカルレポート）

VoR

78

Working Paper Series / Hitotsubashi University Center for Financial Research

https://hdl.handle.net/10086/29333