Template-Type: ReDIF-Paper 1.0
Author-Name: Kevin Salyer
Author-Name-First: Kevin
Author-Name-Last: Salyer
Author-Name: Athanasios Geromichalos
Author-Name-First: Athanasios
Author-Name-Last: Geromichalos
Author-Name: Lucas Herrenbrueck
Author-Name-First: Lucas
Author-Name-Last: Herrenbrueck
Author-Workplace-Name: Department of Economics, University of California Davis
Title: A Search-Theoretic Model of the Term Premium
Abstract: A consistent empirical feature of bond yields is that term premia are,
 on average, positive. That is, investors in long term bonds receive higher
 returns than investors in similar (i.e.\ same default risk) shorter maturity
 bonds over the same holding period. The majority of theoretical explanations
 for this observation have viewed the term premia through the lens
 of the consumption based capital asset pricing model. In contrast, we
 harken to an older empirical literature which attributes the term premium
 to the idea that short maturity bonds are inherently more liquid. The goal
 of this paper is to provide a theoretical justification of this concept. To that end,
 we employ a model in the tradition of modern monetary theory extended to include
 assets of different maturities. Short term assets always mature in time to take advantage of random consumption
 opportunities. Long term assets do not, but agents may liquidate them in a secondary
 asset market, characterized by search-and-bargaining frictions a la Duffie, Garleanu, and Pedersen (2005). In equilibrium, long term assets have
 higher rates of return to compensate agents for their relative lack of liquidity.
 Consistent with empirical findings, our model predicts a steeper yield curve for
 assets that trade in less liquid secondary markets.
Length: 39
File-URL: https://repec.dss.ucdavis.edu/files/GmJSdajD2iS7s49UHbD9FBTY/13-8.pdf
File-Format: application/pdf
Number: 300
Classification-JEL: E31, E43, E52, G12
KeyWords: monetary-search models, liquidity, over-the-counter markets, yield curve
Creation-Date: 20130613
Handle: RePEc:cda:wpaper:300