Supply and demand and the term structure of interest rates

Greenwood, Robin, Hanson, Samuel and Vayanos, Dimitri ORCID: 0000-0002-0944-4914 (2024) Supply and demand and the term structure of interest rates. Annual Review of Financial Economics, 16. 115 - 151. ISSN 1941-1367

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Abstract

We survey the growing literature emphasizing the role that supply and demand forces play in shaping the term structure of interest rates. Our starting point is the Vayanos and Vila model of the term structure of default-free bond yields, which we present in both discrete and continuous time. The key friction in the model is that the bond market is partially segmented from other financial markets: The prices of short-rate and bond supply risks are set by specialized bond arbitrageurs who must absorb shocks to the supply and demand for bonds from other preferred-habitat agents. We discuss extensions of this model in the context of default-free bonds and other asset classes.

Item Type:	Article
Additional Information:	© 2024 by the author(s)
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects) F - International Economics > F3 - International Finance > F31 - Foreign Exchange G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited:	19 Nov 2024 15:51
Last Modified:	19 Nov 2024 15:54
URI:	http://eprints.lse.ac.uk/id/eprint/126107

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