A term structure model with preferences for the timing of resolution of uncertainty (*)
In this paper we present a model of the term structure of interest rates with imperfect information and stochastic differential utility, a form of non-additive recursive utility. A principal feature of recursive utility, that distinguishes it from time-separable expected utility, is its dependence on the timing of resolution of uncertainty. In our model, we parametrize the non-linearity of recursive utility in a way that corresponds to preferences for the timing of resolution. This way we show explicitly the dependence of prices on the rate of information, as a consequence of the nature of utilities. State prices and the term structure of interest rates are obtained in closed form, and are shown to have a form in which derivative asset pricing is tractable. Comparative statics relating to the dependence of the term structure on the rate of information are also discussed.
Year of publication: |
1996
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Authors: | Skiadas, Costis ; Schroder, Mark ; Duffie, Darrell |
Published in: |
Economic Theory. - Springer. - Vol. 9.1996, 1, p. 3-22
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Publisher: |
Springer |
Saved in:
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