Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96632
Authors: 
King, Thomas B.
Year of Publication: 
2013
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2013-18
Abstract: 
Explanations of why changes in the relative quantities of safe debt seem to affect asset prices often appeal informally to a portfolio balance mechanism. I show how this type of effect can be incorporated in a general class of structural, arbitrage-free asset-pricing models using a numerical solution method that allows for a wide range of nonlinearities. I consider some applications in which the Treasury market is isolated, investors have mean-variance preferences, and the short-rate process is truncated at zero. Despite its simplicity, a version of this model incorporating inflation can fit longer-term yields well, and it suggests that fluctuations in Treasury supply explain a sizeable fraction of the historical time-series variation in term premia. Nonetheless, under plausible parameterizations central-bank asset purchases have a fairly small impact on the yield curve by removing duration from the market, and these effects are particularly weak when interest rates are close to their zero lower bound.
Subjects: 
Yield curve
LSAP
quantitative easing
preferred habitat
forward guidance
JEL: 
C63
E43
E44
E52
E58
G11
G12
Document Type: 
Working Paper

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