This model of the term structure of interest rates
with a time-varying quantity of bond risk however does not generate enough variability in nominal bond risk premia (or expected nominal bond excess returns) to match the variability uncovered by predictive regressions of nominal bond excess returns on lagged nominal yield spreads and forward rates.
For the entire sample period, there are strong liquidity effects for the entire term structure of interest rates
with the short end having a slightly higher effect.
Shocks to the net supply of, or demand for, bonds of one maturity do not affect other yields, nor the shape of the term structure of interest rates
A Model of Targer Changes and the Term Structure of Interest Rates
So, if liquidity is an important factor determining the returns of financial assets, liquidity may also be important for yield spreads and the term structure of interest rates
This framework has also been adapted to foreign exchange market anomalies and, as we see in the next paper, the unexplained high volatility of the term structure of interest rates
Ravenna and Seppala (2006) is one recent example of studying the term structure of interest rates
in a consumption-based model that endogenizes consumption--the papers mentioned in the previous two paragraphs treat consumption (and inflation) as exogenous.
The purpose of this article is to show how to use absence-of-arbitrage conditions to solve for the term structure of interest rates
in a discrete-time setting and to do so in a way that is largely independent of the time step.
If the term structure of interest rates
is determined by market expectations, these expectations may be inferred from the shape of the yield curve.
Ross, 1981, A Re-Examination of Traditional Hypotheses About the Term Structure of Interest Rates
, Journal of Finance, 36: 769-799.
The second market condition that affects the price of the call option is the shape of the term structure of interest rates
The results of this paper suggest that the expectations hypothesis provides a good description of the term structure of interest rates
in New Zealand during recent times.