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Unformatted text preview: [Notes on Mishkin Ch.6 & Term Structure  P.1] Mishkin ch.6: Term Structure • Concept of the Yield Curve. Online source : http://www.bloomberg.com/markets/rates/index.html • Three theories: 1. Expectations hypothesis 2. Segmented markets theory 3. Liquidity premium theory ; also called Preferred Habitat theory.  With different assumptions about risk and return  Focus on the liquidity premium theory (others for illustration) • Key questions:  for theory: How do investors tradeoff risk against expected return? for practice: What do investors expect about future interest rates? • Remember:  Bond returns depend on future interest rates  Bond market = efficient market : Investors form rational expectations • Application: Interpreting the yield curve = Extracting information about future interest rates [Notes on Mishkin Ch.6 & Term Structure  P.2] The Main TermStructure Equation i nt = 1 n ! [ i t + i t + 1 e + ... + i t + n " 1 e ] + l nt i nt = yield on nyear bonds; i t = yield on 1year bonds i t+i e = expected yield on 1year bonds in year t+i l nt = liquidity premium on nyear bonds...
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This note was uploaded on 12/26/2011 for the course ECON 135 taught by Professor Bohn,h during the Fall '08 term at UCSB.
 Fall '08
 Bohn,H

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