The Term Structure of Real Interest Rates: Theory and Evidence from UK Index-Linked Bonds

Abstract

This paper argues that a simple general equilibrium model can explain two of the most persistent term structure puzzles. First, Donaldson, Johnsen, and Mehra 1990 show that while in the U.S. nominal term structure the interest rates are pro-cyclical and term spreads counter-cyclical the stochastic growth model predicts that the interest rates are counter-cyclical and term spreads pro-cyclical. The resolution of this puzzle is simple. Using the data on the U.K. index-linked bonds, I show that during the sample period 1984:1 1995:8 the ex-ante real interest rates were counter-cyclical and term spreads pro-cyclical. Second, according to Backus, Gregory, and Zin 1989 a complete markets model can account for neither the sign nor the magnitude of average risk premiums in forward prices. This paper applies recent research by Alvarez and Jermann 1999ab to the term premium puzzle. It is shown that the model A previous version of this paper was circulated under the title The Term Structure of Interest Rates under Limited Commitment." Current v ersion is preliminary and incomplete. Comments are most welcome. Revisions can bedownloaded from http: home.uchicago.edu ~jiseppal research.

A consumption-based model of the term structure of interest rates☆

“…Boudoukh (1993) explains the upward sloping yield curve in a model where agents have power utility and inflation and consumption growth are heteroscedastic. 14 Independently and concurrently with this paper, Seppala (2003) shows that a model where risk sharing is limited because of risk of default also can exhibit an upward sloping yield curve and time-varying risk premia on inflationindexed bonds. 15 The literature has identified several problems with this regression that could bias the coefficients upward or downward.…”

The TIPS‐Treasury Bond Puzzle

“…This paper contributes to the literature on the pricing of inflation-linked bonds. Other important papers on real bonds include Roll (1996Roll ( , 2004, Barr and Campbell (1997), Evans (2003), Seppälä (2004), Bardong and Lehnert (2004), Buraschi and Jiltsov (2005), Wei (2007, 2008), Campbell, Shiller, and Viceira (2009), Dudley, Roush, and Ezer (2009), Fleming and Krishnan (2009, Adrian and Wu (2009), Barnes et al (2009), Gürkaynak, Sack, andWright (2010), Christensen, Lopez, and Rudebusch (2010a, b), Andonov, Bardong, and Lehnert (2010), Pflueger and Viceira (2011a, b), and many others. This paper differs from the previous literature by being the first to formally study the no-arbitrage relation between TIPS and Treasury bonds and explore the determinants of the mispricing.…”

Theoretical Framework Measures Management Accounting Systems and Credit Risk Management Policies and Practices towards Organizational Performance in Palestinian Commercial Banks

“…Measures in credit monitoring are used to ensure that the current financial condition of the borrower and counterparty is understood by the bank, to make sure that the existing covenant is in subjugation with all credits, to follow the use customer make of approved credit lines, to confirm that debt servicing requirements are in compliance with cash flow on major credits, and to ensure that where applicable, collateral provides adequate coverage relative (Seppala, 2000). Dugan (2009) suggests that the level of loan loss provisioning have to be able to demonstrate the beliefs of bank management on the quality on the loan portfolio that they own stating that provisions must be able to include the whole spectrum of potential credit losses if they think of provisions as a measure of true credit risk.…”