Our news editors obtained a quote from the research, "Long bonds command a 'liquidation risk premium' over short bonds, because they may have to be liquidated before maturity following a bad idiosyncratic shock precisely when their resale value is low due to the simultaneous occurrence of a bad aggregate shock. Our framework endogenously generates limited cross-sectional wealth heterogeneity among the agents (despite the presence of uninsured idiosyncratic shocks), which allows us to characterise analytically the shape of the entire yield curve, including the yields on bonds of arbitrarily long maturities."
According to the news editors, the research concluded: "Agents' desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms implies that a greater bond supply raises the level of the yield curve, while an increase in the relative supply of long bonds raises its slope."
For more information on this research see: Incomplete markets, liquidation risk, and the term structure of interest rates.
The news editors report that additional information may be obtained by contacting
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