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http://hdl.handle.net/10419/23244
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| Title: | | Non-Negativity of Nominal and Real Riskless Rates, Arbitrage Theory, and the Null-Alternative Cash  |
| Authors: | | Wilhelm, Jochen Nietert, Bernhard |
| Issue Date: | | 2004 |
| Series/Report no.: | | Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 11 |
| Abstract: | | Pragmatic-world nominal riskless rates are non-negative. However, conventional arbitrage theory has yet to develop a theoretical justification of this phenomenon. – We define the null-alternative cash as an investor holding onto cash and refraining from investment and consumption ("doing nothing"); we use the null-alternative cash to prove that both nominal spot and nominal forward rates are non-negative and that prices of zero-coupon bonds do not increase with increasing maturity. In a positive inflation environment, however, both real spot and real forward rates might well become negative, but prices of zero-coupon bonds still do not increase with increasing maturity. |
| Subjects: | | arbitrage theory inflation non-negativity of spot and forward rates short selling constraints |
| JEL: | | G10 G12 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe, Universität Passau
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| B-11-04.pdf | | 49.89 kB | Adobe PDF |
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