TY  - JOUR
AU  - Vayanos,Dimitri
AU  - Vila,Jean-Luc
TI  - A Preferred-Habitat Model of the Term Structure of Interest Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15487
PY  - 2009
Y2  - November 2009
UR  - http://www.nber.org/papers/w15487
L1  - http://www.nber.org/papers/w15487.pdf
N1  - Author contact info:
Dimitri Vayanos
Department of Finance, A350
London School of Economics
Houghton Street
London WC2A 2AE
UNITED KINGDOM
Tel: +44 (0)20 7955 6382
Fax: +44 (0)20 7955 7420
E-Mail: d.vayanos@lse.ac.uk

Jean-Luc Vila
Bank of America Merrill Lynch
2 King Edward Street
London EC1A 1HQ
United Kingdom
E-Mail: Jean-Luc.Vila@baml.com
AB  - We model the term structure of interest rates as resulting from the interaction between investor clienteles with preferences for specific maturities and risk-averse arbitrageurs. Because arbitrageurs are risk averse, shocks to clienteles' demand for bonds affect the term structure---and constitute an additional determinant of bond prices to current and expected future short rates. At the same time, because arbitrageurs render the term structure arbitrage-free, demand effects satisfy no-arbitrage restrictions and can be quite different from the underlying shocks. We show that the preferred-habitat view of the term structure generates a rich set of implications for bond risk premia, the effects of demand shocks and of shocks to short-rate expectations, the economic role of carry trades, and the transmission of monetary policy.
ER  -