Journal Article

The Real Term Premium in a Stationary Economy with Segmented Asset Markets

Abstract: This article proposes a general equilibrium model to explain the positive and sizable term premia implied by the data. The authors introduce a slow mean-reverting process of consumption growth and a segmented asset-market mechanism with heterogeneous trading technologies into an otherwise standard heterogeneous agent general equilibrium model. First, the slow mean-reverting consumption growth process implies that the expected consumption growth rate is only slightly countercyclical and the process can exhibit near-zero first-order autocorrelation, as observed in the data. This slight countercyclicality suggests that long-term bonds are risky, and hence the term premia should be positive. Second, the segmented asset-market mechanism amplifies the magnitude of the term premia because aggregate risk is highly concentrated in a small fraction of marginal traders who demand high compensation for taking risk. For sensitivity analysis, the role of each assumption is further investigated by removing each factor one at a time.

JEL Classification: G11; G12; E30;

Access Documents

File(s): File format is application/pdf
Description: Full text


Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2019

Volume: 101

Issue: 2

Pages: 115-134