The Term Structure Of Interest Rate In An Economy Where Investors Have Heterogeneous Recursive Preferences PDF Download

Chapter one---Risk Sharing and the Term Structure of Interest Rates I propose a general equilibrium model with heterogeneous investors to explain the key properties of the U.S. real and nominal term structure of interest rates. I find that differences in investors' willingness to substitute consumption across time are critical to account for nominal and real yields dynamics. When the endogenous amount of credit supplied by risk-tolerant investors is low, the aggregate price of risk and the real interest rate are high. Thus, real bonds are risky. I study nominal bonds under both exogenous and endogenous (Taylor rule) inflation. I find that when the Taylor loading on inflation is greater than one, the nominal term structure is upward sloping regardless of the correlation between nominal and real shocks. I use the model to shed light on two salient interest rate puzzles: (1) the secular decline of long-term real and nominal rates since the 1980s, and (2) the sudden spike in real yields at the height of the Great Recession. Chapter 2---Endogenous and Exogenous Risk Premia In this second chapter, I investigate how levered balance sheets amplify the effects of exogenous aggregate volatility shocks on asset prices. Risk premia are determined by the interaction of exogenous time-varying fundamentals with the endogenously determined levered balance sheets. When macro-volatility shocks hit the economy, asset prices decline, levered agent loses relatively more net worth and aggregate risk aversion rises endogenously. I find that this feedback between balance sheets and macro-volatility produces six times more volatile premiums than an economy with only cash flow shocks, thus improving the model's ability to match the data. However, the effects on investment and growth are mild. Chapter 3---Liquidity Shocks, Business Cycles and Asset Prices The third chapter is joint work with Saki Bigio. In the aftermath of the Great Recession, macro models that feature financing constraints have attracted increasing attention. Among these, Kiyotaki and Moore 2008 is a prominent example. In this paper, we investigate whether the liquidity shocks and financial frictions proposed by Kiyotaki and Moore 2008 can improve the asset pricing predictions of the frictionless RBC model. We study the quantitative business cycle and asset pricing properties in an economy in which agents feature recursive preferences, are subject to a liquidity constraint, and suffer liquidity shocks. We find that the model predicts highly nonlinear time variation and levels of risk premia, which are driven by endogenous fluctuations in equity prices. However, the model fails to account for a basic fact: Periods of scarce liquidity are associated with high asset prices and low expected returns. Chapter 4---A Macrofinance View of U.S. Sovereign CDS Premiums The forth and last chapter of the dissertation is joint work with Mikhail Chernov and Lukas Schmid. Premiums on U.S. sovereign CDS have risen to persistently elevated levels since the financial crisis. We ask whether these premiums reflect the probability of a fiscal default a state in which budget balance can no longer be restored by raising taxes or eroding the real value of debt by raising inflation. We develop an equilibrium macrofinance model in which the fiscal and monetary policy stance jointly endogenously determine nominal debt, taxes, inflation and growth. We show how CDS premiums reflect endogenous risk-adjusted fiscal default probabilities. A calibrated version of the model is quantitatively consistent with the observed CDS premiums.