A Preferred-Habitat Model of the Term Structure of Interest Rates

Dimitri Vayanos, Jean-Luc Vila

NBER Working Paper No. 15487
Issued in November 2009
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, Monetary Economics

We model the term structure of interest rates as resulting from the interaction between investor clienteles with preferences for specific maturities and risk-averse arbitrageurs. Because arbitrageurs are risk averse, shocks to clienteles' demand for bonds affect the term structure---and constitute an additional determinant of bond prices to current and expected future short rates. At the same time, because arbitrageurs render the term structure arbitrage-free, demand effects satisfy no-arbitrage restrictions and can be quite different from the underlying shocks. We show that the preferred-habitat view of the term structure generates a rich set of implications for bond risk premia, the effects of demand shocks and of shocks to short-rate expectations, the economic role of carry trades, and the transmission of monetary policy.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w15487

Published: Dimitri Vayanos & Jean‐Luc Vila, 2021. "A Preferred‐Habitat Model of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 89(1), pages 77-112, January. citation courtesy of