A THEORY OF THE TERM STRUCTURE OF INTEREST RATES
This paper is an extended version of the second half of an earlier working paper with the same title. We are grateful for the helpful comments and suggestions of many of our colleagues, both at our own institutions and others. This research was partially supported by the Dean Witter Foundation, the Center for Research in Security Prices, and the National Science Foundation.
This paper uses an intertemporal general equilibrium asset pricing model to study the term structure of interest rates. In this model, anticipations, risk aversion, investment alternatives, and preferences about the timing of consumption all play a role in determining bond prices. Many of the factors traditionally mentioned as influencing the term structure are thus included in a way which is fully consistent with maximizing behavior and rational expectations. The model leads to specific formulas for bond prices which are well suited for empirical testing.
