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Recent Findings from E. Challe and Co-Authors Yields New Data on Theoretical Economics

February 21, 2014



By a News Reporter-Staff News Editor at Economics Week -- Research findings on Theoretical Economics are discussed in a new report. According to news reporting originating from Paris, France, by VerticalNews correspondents, research stated, "We analyse the term structure of interest rates in a general equilibrium model with incomplete markets, borrowing constraint, and positive net supply of government bonds. Uninsured idiosyncratic shocks generate bond trades, while aggregate shocks cause fluctuations in the trading price of bonds."

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. Journal of Economic Theory, 2013;148(6):2483-2519. Journal of Economic Theory can be contacted at: Academic Press Inc Elsevier Science, 525 B St, Ste 1900, San Diego, CA 92101-4495, USA. (Elsevier - www.elsevier.com; Journal of Economic Theory - www.elsevier.com/wps/product/cws_home/622869)

The news editors report that additional information may be obtained by contacting E. Challe, PSE, F-75014 Paris, France. Additional authors for this research include F. Le Grand and X. Ragot.

Keywords for this news article include: Paris, France, Europe, Theoretical Economics

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Source: Economics Week


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