Skip to main content
main-content

Über dieses Buch

Real world investors differ in their tastes and attitudes and they do not have, in general, perfect information about the future prospects of the economy. Most theoretical models, however, assume to the contrary that investors are homogeneous and perfectly informed about the market. In this book, an attempt is made to overcome these shortcomings. In three different case studies, the effect of heterogeneous time preferences, heterogeneous beliefs and imperfect information about the economy's growth on the term structure of interest rates are studied. The initial chapter gives an introduction to the theory of financial markets in continuous time under imperfect information and establishes the existence of an equilibrium with complete markets.

Inhaltsverzeichnis

Frontmatter

Introduction

Abstract
On today’s asset markets, investors can choose among a wide range of debt instruments with distinct effective yields. In particular, interest rates differ for different terms, that is, times until maturity. The relationship between term and interest rate is called the term structure of interest rates. Usually, the longer the term, the higher is the effective yield, and the term structure is rising. However, sometimes the converse occurs, and yields for long term instruments are lower than those for short term instruments, implying declining or humped term structure shapes. It is therefore important to understand why the term structure can have these different forms and how various factors influence te term structurhe of interest rates.
Frank Riedel

1. Imperfect Information and Complete Asset Markets in Continuous Time

Abstract
This chapter is, first, an introduction to the theory of financial markets in continuous time. The framework is laid out for the applications to the theory of interest rates in the following chapters. Furthermore, I present two extensions of the established theory. The first is of a technical nature, concerned with removing a boundedness assumption made up to now in the pertinent literature, and the second is to demonstrate how imperfect information, in this setting, leads to complete asset markets.
Frank Riedel

2. Heterogeneous Time Preferences - The Preferred Habitat Theory Revisited

Abstract
As a first application of the general theory to the theory of the term structure, I study the Preferred Habitat Theory advanced by Modigliani and Sutch [50]. Modigliani and Sutch were primarily concerned with an empirical investigation of the effects of a particular policy of the US government and Federal Reserve, “Operation Twist”, which aimed at “twisting” the yield curve by raising the yield of bonds with short term to maturity and lowering simultaneously long-term rates. It was believed that this policy would help to reduce the balance-of-payments problem of the US. In order to give a rationale for the linear model they estimated, they reviewed the existing theories of the term structure, mainly the Expectations and the Liquidity Premium Hypothesis, and they developed their own theory, which has become known under the name of ‘Preferred Habitat Theory’.
Frank Riedel

3. Imperfect Information: The Term Structure when the Growth Rate is Unknown

Abstract
This chapter serves to illustrate the effect of imperfect information on the term structure of interest rates. To isolate the informational aspect, a homogeneous economy is studied in which all agents have the same type of preferences and beliefs. The output of the economy grows at a constant rate, which is known in the case of perfect information and unknown in the case of imperfect information. In the latter case, agents engage in Bayesian inference and choose their portfolio and consumption plan on the basis of the estimated growth rate. Since there is only one Brownian motion involved, the asset market turns out to be complete under perfect, as well as under imperfect information. It is therefore possible to compare the resulting equilibrium interest rates.
Frank Riedel

4. Bulls and Bears: Heterogeneous Expectations

Abstract
“It is differences in opinion that makes horse races”, Mark Twain says. Following this saying, I study differences in ex­pectations among agents in this chapter. Agents conform that the state of the world is described by a diffusion model as in Chapter 1. They differ, however, in their prior beliefs about some unknown parameters of the model. To give an example, the drift of the growth rate may be unknown, as in the pre­ceding chapter, and some agents, call them bulls, might hold more optimistic views about this drift than others.
Frank Riedel

Backmatter

Weitere Informationen