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Asia-Pacific Financial Markets

, Volume 15, Issue 3–4, pp 273–305 | Cite as

Term Structure of Interest Rates Under Recursive Preferences in Continuous Time

  • Hisashi Nakamura
  • Keita Nakayama
  • Akihiko Takahashi
Article
  • 77 Downloads

Abstract

This paper proposes a testable continuous-time term-structure model with recursive utility to investigate structural relationships between the real economy and the term structure of real and nominal interest rates. In a representative-agent model with recursive utility and mean-reverting expectations on real output growth and inflation, this paper shows that, if (1) real short-term interest rates are high during economic booms and (2) the agent is comparatively risk-averse (less risk-averse) relative to time-separable utility, then a real yield curve slopes down (slopes up, respectively). Additionally, for the comparatively risk-averse agent, if (3) expected inflation is negatively correlated with the real output and its expected growth, then a nominal yield curve can slope up, regardless of the slope of the real yield curve.

Keywords

Term structure of interest rates Recursive preference Continuous time 

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Copyright information

© Springer Science+Business Media, LLC. 2009

Authors and Affiliations

  • Hisashi Nakamura
    • 1
  • Keita Nakayama
    • 1
  • Akihiko Takahashi
    • 1
  1. 1.Graduate School of EconomicsUniversity of TokyoBunkyo-ku, TokyoJapan

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