College of Business, Canisius College. The author wishes to acknowledge the generous efforts of an anonymous referee.
A Model of Intertemporal Discount Rates in the Presence of Real and Inflationary Autocorrelations
Article first published online: 30 APR 2012
1987 The American Finance Association
The Journal of Finance
Volume 42, Issue 4, pages 1049–1070, September 1987
How to Cite
BOSSHARDT, D. I. (1987), A Model of Intertemporal Discount Rates in the Presence of Real and Inflationary Autocorrelations. The Journal of Finance, 42: 1049–1070. doi: 10.1111/j.1540-6261.1987.tb03927.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper discusses the pricing of assets in an intertemporal rational-expectations model when real production and inflation evolve according to first-order autocorrelated processes. The focus is on the structure of the various intertemporal discount rates (yields) exhibited by this economy. Yield curves are identified for consumption claims, indexed bonds, and nominally riskless bonds and can be extended to any claim that can be approximated by a (finite) linear combination of such securities. The model demonstrates that, if the average term structure for nominally riskless securities is upward sloping, then the yield curve for consumption (market) claims is downward sloping, suggesting that conventional methods for computing long-term discount rates err by not accounting for maturity factors. The paper also explores the relationship between the intertemporal equilibrium and its embedded single-period equilibria. The single-period risk measures in this economy are derived and shown to be (generally) functions of maturity. A model of nominal bond betas is constructed along these lines. It is shown that bond betas that are increasing functions of maturity do not necessarily imply an upward-sloping term structure.