A CONSUMPTION BASED ASSET PRICING MODEL OF THE YIELD CURVE

Open Access
Author:
Born, Nathan Patrick
Area of Honors:
Economics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Alessandro Dovis, Thesis Supervisor
  • Russell Paul Chuderewicz, Honors Advisor
Keywords:
  • Yield curve
  • interest
  • interest rate
  • Expectations Hypothesis
  • economics
  • asset pricing
  • consumption based asset pricing model
Abstract:
This paper seeks to create a representative model of the yield curve by combining the standard consumption based asset pricing model used by Canzoneri, et al and the equation for the Pure Expectations Hypothesis of the Term Structure of Interest Rates. I begin with reviewing different theories of the yield curve. I then use consumption based asset pricing model in conjunction with the expectations hypothesis to see whether the models can accurately represent the data on yield curve slopes. I conclude with an examination of the forward looking aspects of the yield curve. I find that the forward-looking nature of the yield curve which is implied by the Expectations Hypothesis is not entirely reliable in predicting real GDP.