Negative real interest rates

Chen, Jing ORCID: https://orcid.org/0000-0001-7135-2116, Ma, Diandian, Song, Xiaojong and Tippett, Mark 2017. Negative real interest rates. European Journal of Finance 23 (15) , pp. 1447-1467. 10.1080/1351847X.2016.1158729

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Abstract

Standard textbook general equilibrium term structure models such as that developed by Cox, Ingersoll and Ross (1985b), do not accommodate negative real interest rates. Given this, the Cox, Ingersoll and Ross (1985b) “technological uncertainty variable” is formulated in terms of the Pearson Type IV probability density. The Pearson Type IV encompasses mean reverting sample paths, time varying volatility and also allows for negative real interest rates. The Fokker-Planck (that is, the Chapman-Kolmogorov) equation is then used to determine the conditional moments of the instantaneous real rate of interest. These enable one to determine the mean and variance of the accumulated (that is, integrated) real rate of interest on a bank (or loan) account when interest accumulates at the instantaneous real rate of interest defined by the Pearson Type IV probability density. A pricing formula for pure discount bonds is also developed. Our empirical analysis of short dated Treasury bills shows that real interest rates in the U.K. and the U.S. are strongly compatible with a general equilibrium term structure model based on the Pearson Type IV probability density.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Mathematics
Subjects:	H Social Sciences > HA Statistics H Social Sciences > HB Economic Theory H Social Sciences > HG Finance Q Science > QA Mathematics
Publisher:	Taylor & Francis
ISSN:	1351-847X
Date of First Compliant Deposit:	25 February 2020
Date of Acceptance:	9 February 2016
Last Modified:	06 Nov 2023 20:47
URI:	https://orca.cardiff.ac.uk/id/eprint/87451

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