Recent empirical studies suggest a downward sloping term structure of Sharpe ratios. We present a theoretical framework in continuous time that can cope with such a non-flat forward curve of risk prices. The approach departs from an arbitrage-free and incomplete market setting when different...

We develop a portfolio balance model to analyze the impact of euro area quantitative easing (QE) on asset yields. Our model features two countries each populated by two agents representing their respective banking and mututal fund sectors. Agents, which differ in their preferences for assets,...

We propose an arbitrage-free shadow-rate term structure model to analyze the euro-area yield curve from 1999 to mid-2015, when bond yields turned negative at various maturities. In the model the 'shadow rate' can reach any positive or negative level, while the actual one-month rate cannot fall...

We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. The lower effectiveness of monetary policy can be linked to weaker...

Expectations about macroeconomic developments are important determinants of long term interest rates. In this paper, I compare two different assumptions on how agents may form their expectations about the economy and yields in a pseudo real time exercise. Based on the no-arbitrage...

This paper presents a new approach, based on the Merton model, to decomposing corporate bond spreads into the expected loss, bond risk premium and liquidity premium components. The approach focuses on establishing the bond risk premium using the equity risk premium and the hedge ratio, which are...