DP13176 Notes on the Yield Curve

Author(s): Ian Martin, Stephen Ross
Publication Date: September 2018
Keyword(s): Cheeger inequality, eigenvalue gap, recovery theorem, term structure, traps, Yield Curve
JEL(s): G12
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13176

We study the properties of the yield curve under the assumptions that (i) the fixed-income market is complete and (ii) the state vector that drives interest rates follows a finite discrete-time Markov chain. We focus in particular on the relationship between the behavior of the long end of the yield curve and the recovered time discount factor and marginal utilities of a pseudo-representative agent; and on the relationship between the "trappedness" of an economy and the convergence of yields at the long end.