We assume the short-term rate to revert towards a central tendency which in, turn, is stochastically changing over time. We impose minimal restrictions on the joint behavior of the short-term rate and the central-tendency factor, and derive implications for the term structure of interest rates....

We assume that the instantaneous riskless rate reverts towards a central tendency which, in turn, is changing stochastically over time, and we derive a model of the term structure of interest rates. Our term-structure model implies that a linear combination of any two rates can be used as a...

We consider the implications for mean factor risk premia for the variance of admissible (normalized) stochastic discount factors, or pricing kernels. For given mean risk premia, we identify lower bounds on the variance of the pricing kernel which exceed the variance of the projection of the...

We assume that the instantaneous riskless rate reverts toward a central tendency which, in turn, is changing stochastically over time. As a result, current short-term rates are not sufficient to predict future short-term rates movements, as it would be the case if the central tendency was...

We model an economy where stocks and bonds (consols) are traded by two types of agents: speculators, expected utility maximizers always present in the market, and infrequent traders, whose trading motives are not explicitly modeled. A solution technique for equilibrium prices is developed when...

We explore the effects of overnight-rate targeting on nominal interest rates of longer maturities. In a realistic model of noisy targeting and infrequent target changes, expectations of future policy actions introduce persistent spreads between interest rates of different maturities. Some...

This paper studies the effects on financial markets of an anticipated fiscal stabilization policy in a stochastic environment. Stabilization is defined as a discrete change in the budget process which is implemented when government consumption reaches some threshold level, known by economic...

We explore the link between the overnight fed funds rate, which is actively targeted by the Federal Reserve, and longer-maturity term fed funds rates. We develop a term-structure model which explicitly accounts for interest rate targeting and for the predictability of future target changes. The...

This paper reexamines the proxy hypothesis of Fama (American Economic Review, 1981, 71, 545-565) as the main explanation for the negative correlation between stock returns and inflation. We look at quarterly data on industrial-production growth, monetary-base growth, CPI inflation, three-month...

Real money balances are held separately for consumption and portfolio reasons. When real balances are a state variable in the investor s optimization problem, there is a specific inflation-hedging portfolio. An investor hedges against inflation when the effect of real money holdings on the...