Suchergebnisse

This study argues that a future payment's risk approaches zero as maturity approaches zero. We employ two factors to model the risk-free rate (which is captured by the central bank's short-term rate) that the market expects the current monetary policy to move towards the neutral level over a certain period. We expect that the T-bill risk captures the macro-risk (i.e., inflation risk) of a future payment. Our 3-factor final model thus splits recent yields of US and Canada T-bills into the risk and risk-free rate, on average explaining 97% of the yields. Our modeling is a gateway to equity risk and macro-risk and micro-risk (i.e., firm risk) of corporate bonds.

Abstract
Macroeconomists failed to predict the Great Recession, suggesting that the existing macroeconomic models may have been misspecified. Bearing in mind this potential misspecification or 'model uncertainty', how do agents' optimal decisions change? Furthermore, how large are the welfare costs of model misspecification? To shed light on these questions, we develop a tractable continuous-time general equilibrium model to show that a fear of model misspecification reduces both the equilibrium interest rate and the relative inequality of consumption to income, making the model's predictions closer to the data. Our quantitative analysis shows that the welfare costs of model uncertainty are sizable.