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The Term Structure of Interest Rates in a Partially Observable Economy
Author(s) -
FELDMAN DAVID
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb04391.x
Subject(s) - term (time) , economics , contrast (vision) , exchange economy , econometrics , observable , production (economics) , function (biology) , interest rate , investment (military) , inference , identification (biology) , market structure , microeconomics , monetary economics , computer science , physics , botany , quantum mechanics , artificial intelligence , evolutionary biology , politics , law , political science , biology
ABSTRACT This paper investigates the term structure of interest rates in a multiperiod production and exchange economy with incomplete information. Unable to observe their stochastic investment opportunities, investors engage in dynamic Bayesian inference. This results in the endogenous identification of a more complex production function which generates a richer term structure, resembling the one that actual market prices imply. In addition, this paper introduces a characteristic function of the term structure and demonstrates that, in contrast with a fully observable economy, the widely investigated expectations hypothesis holds true only if interest rates are nonstochastic.