Academic Commons

Reports

Uninsurable Risk and the Determination of Real Interest Rates: An Investigation Using UK Indexed Bonds

Barr, David; Basu, Parantap; Wada, Kenji

This paper investigates the empirical performance of a new class of uninsurable risk models in the context of UK indexed bond market. Using closed form expressions for pricing kernels, we test the ability of three consumption-based models to price indexed bonds in the UK, and find that the standard general equilibrium, complete markets model is soundly rejected in favour of two uninsurable-risk models. Using the estimated bond price equation, impulse response analysis is undertaken to understand the effects of three macroeconomic fundamental shocks on real interest rates. In contrast to the estimates that typically arise in equity markets, the estimated coefficient of relative risk aversion is found to be small in this class of models with uninsurable risk.

Subjects

Files

More About This Work

Academic Units
Center on Japanese Economy and Business
Publisher
Center on Japanese Economy and Business, Columbia University
Series
Center on Japanese Economy and Business Working Papers, 305
Published Here
August 9, 2012
Academic Commons provides global access to research and scholarship produced at Columbia University, Barnard College, Teachers College, Union Theological Seminary and Jewish Theological Seminary. Academic Commons is managed by the Columbia University Libraries.