Real and Nominal Interest Rates: A Discrete-Time Model and Its Continuous- Time Limit

I provide a general equilibrium theory of the term structure of real interest rates in a discrete-time economy. I derive the prices for one-period and two-period real bonds and a simple recursive formula for general k-period bonds, and prove that the price formula with appropriately specified parame...

Full description

Saved in:
Bibliographic Details
Published in:The Review of financial studies 1992-01, Vol.5 (4), p.581-611
Main Author: Sun, Tong-sheng
Format: Article
Language:English
Subjects:
Arbitrage
Bond market
Consumer Price Index
Consumption
Discounts
Economic growth rate
Economic modeling
Economic models
Endowment
Endowments
Equilibrium
Financial bonds
Financial economics
Growth rate
Hypotheses
Inflation rates
Interest rates
Nominal interest rates
Price levels
Risk premiums
Utility functions
Yield to maturity
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
cited_by cdi_FETCH-LOGICAL-c332t-2de4f8226cae026f0d8c1f11fc303caadc74fb765316f748e625a2fdda03d8593
cites cdi_FETCH-LOGICAL-c332t-2de4f8226cae026f0d8c1f11fc303caadc74fb765316f748e625a2fdda03d8593
container_end_page 611
container_issue 4
container_start_page 581
container_title The Review of financial studies
container_volume 5
creator Sun, Tong-sheng
description I provide a general equilibrium theory of the term structure of real interest rates in a discrete-time economy. I derive the prices for one-period and two-period real bonds and a simple recursive formula for general k-period bonds, and prove that the price formula with appropriately specified parameters converges to that of the Cox, Ingersoll, and Ross model (1985). In addition, I consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy. Finally, I provide an illustrative empirical investigation of the model. The results indicate a significant correlation between the price level and the growth rate of consumption, which does not support the "money neutrality" assumption underlying Cox, Ingersoll, and Ross's nominal bond prices and related empirical studies, such as Gibbons and Ramaswamy (1992), Heston (1991), and Pearson and Sun (1991).
doi_str_mv 10.1093/rfs/5.4.581
format article
fullrecord <record><control><sourceid>jstor_proqu</sourceid><recordid>TN_cdi_proquest_miscellaneous_38485280</recordid><sourceformat>XML</sourceformat><sourcesystem>PC</sourcesystem><jstor_id>2962142</jstor_id><sourcerecordid>2962142</sourcerecordid><originalsourceid>FETCH-LOGICAL-c332t-2de4f8226cae026f0d8c1f11fc303caadc74fb765316f748e625a2fdda03d8593</originalsourceid><addsrcrecordid>eNp10UtLAzEUBeAgCtbqyq2LQcGNTJv3ZNyV-ipUhdKuQ8wDpnQmNcks_PdGR1wIrnIhXy4nHADOEZwgWJNpcHHKJnTCBDoAI0Q5KyvCxSEYQVGTsqaMHoOTGLcQQkQoHIHNyqpdoTpTvPi26fK86JINNqZipZKNt8WsuGuiDjbZct20tnj2xg4vFikWc9-lput9H8vi-3rZtE06BUdO7aI9-znHYPNwv54_lcvXx8V8tiw1ITiV2FjqBMZcKwsxd9AIjRxCThNItFJGV9S9VZwRxF1FheWYKeyMUZAYwWoyBtfD3n3w730OLduc1e52qrM5kiSCCoYFzPDyD9z6PuTvRolhxQWqCMro6j-EcI0Rq5EgWd0MSgcfY7BO7kPTqvAhEZRfLcjcgmSSytxC1heD3sbkwy_FNceIYvIJKGCB3Q</addsrcrecordid><sourcetype>Aggregation Database</sourcetype><iscdi>true</iscdi><recordtype>article</recordtype><pqid>1292159183</pqid></control><display><type>article</type><title>Real and Nominal Interest Rates: A Discrete-Time Model and Its Continuous- Time Limit</title><source>EconLit s plnými texty</source><source>EBSCOhost Business Source Ultimate</source><source>International Bibliography of the Social Sciences (IBSS)</source><source>Oxford University Press Archive</source><source>JSTOR</source><creator>Sun, Tong-sheng</creator><creatorcontrib>Sun, Tong-sheng</creatorcontrib><description>I provide a general equilibrium theory of the term structure of real interest rates in a discrete-time economy. I derive the prices for one-period and two-period real bonds and a simple recursive formula for general k-period bonds, and prove that the price formula with appropriately specified parameters converges to that of the Cox, Ingersoll, and Ross model (1985). In addition, I consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy. Finally, I provide an illustrative empirical investigation of the model. The results indicate a significant correlation between the price level and the growth rate of consumption, which does not support the "money neutrality" assumption underlying Cox, Ingersoll, and Ross's nominal bond prices and related empirical studies, such as Gibbons and Ramaswamy (1992), Heston (1991), and Pearson and Sun (1991).</description><identifier>ISSN: 0893-9454</identifier><identifier>EISSN: 1465-7368</identifier><identifier>DOI: 10.1093/rfs/5.4.581</identifier><language>eng</language><publisher>New York, NY: Oxford University Press</publisher><subject>Arbitrage ; Bond market ; Consumer Price Index ; Consumption ; Discounts ; Economic growth rate ; Economic modeling ; Economic models ; Endowment ; Endowments ; Equilibrium ; Financial bonds ; Financial economics ; Growth rate ; Hypotheses ; Inflation rates ; Interest rates ; Nominal interest rates ; Price levels ; Risk premiums ; Utility functions ; Yield to maturity</subject><ispartof>The Review of financial studies, 1992-01, Vol.5 (4), p.581-611</ispartof><rights>Copyright 1992 The Society for Financial Studies</rights><rights>Copyright Oxford University Press(England) Winter 1992</rights><lds50>peer_reviewed</lds50><woscitedreferencessubscribed>false</woscitedreferencessubscribed><citedby>FETCH-LOGICAL-c332t-2de4f8226cae026f0d8c1f11fc303caadc74fb765316f748e625a2fdda03d8593</citedby><cites>FETCH-LOGICAL-c332t-2de4f8226cae026f0d8c1f11fc303caadc74fb765316f748e625a2fdda03d8593</cites></display><links><openurl>$$Topenurl_article</openurl><openurlfulltext>$$Topenurlfull_article</openurlfulltext><thumbnail>$$Tsyndetics_thumb_exl</thumbnail><linktopdf>$$Uhttps://www.jstor.org/stable/pdf/2962142$$EPDF$$P50$$Gjstor$$H</linktopdf><linktohtml>$$Uhttps://www.jstor.org/stable/2962142$$EHTML$$P50$$Gjstor$$H</linktohtml><link.rule.ids>314,780,784,27922,27923,33222,58236,58469</link.rule.ids></links><search><creatorcontrib>Sun, Tong-sheng</creatorcontrib><title>Real and Nominal Interest Rates: A Discrete-Time Model and Its Continuous- Time Limit</title><title>The Review of financial studies</title><description>I provide a general equilibrium theory of the term structure of real interest rates in a discrete-time economy. I derive the prices for one-period and two-period real bonds and a simple recursive formula for general k-period bonds, and prove that the price formula with appropriately specified parameters converges to that of the Cox, Ingersoll, and Ross model (1985). In addition, I consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy. Finally, I provide an illustrative empirical investigation of the model. The results indicate a significant correlation between the price level and the growth rate of consumption, which does not support the "money neutrality" assumption underlying Cox, Ingersoll, and Ross's nominal bond prices and related empirical studies, such as Gibbons and Ramaswamy (1992), Heston (1991), and Pearson and Sun (1991).</description><subject>Arbitrage</subject><subject>Bond market</subject><subject>Consumer Price Index</subject><subject>Consumption</subject><subject>Discounts</subject><subject>Economic growth rate</subject><subject>Economic modeling</subject><subject>Economic models</subject><subject>Endowment</subject><subject>Endowments</subject><subject>Equilibrium</subject><subject>Financial bonds</subject><subject>Financial economics</subject><subject>Growth rate</subject><subject>Hypotheses</subject><subject>Inflation rates</subject><subject>Interest rates</subject><subject>Nominal interest rates</subject><subject>Price levels</subject><subject>Risk premiums</subject><subject>Utility functions</subject><subject>Yield to maturity</subject><issn>0893-9454</issn><issn>1465-7368</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>1992</creationdate><recordtype>article</recordtype><sourceid>8BJ</sourceid><recordid>eNp10UtLAzEUBeAgCtbqyq2LQcGNTJv3ZNyV-ipUhdKuQ8wDpnQmNcks_PdGR1wIrnIhXy4nHADOEZwgWJNpcHHKJnTCBDoAI0Q5KyvCxSEYQVGTsqaMHoOTGLcQQkQoHIHNyqpdoTpTvPi26fK86JINNqZipZKNt8WsuGuiDjbZct20tnj2xg4vFikWc9-lput9H8vi-3rZtE06BUdO7aI9-znHYPNwv54_lcvXx8V8tiw1ITiV2FjqBMZcKwsxd9AIjRxCThNItFJGV9S9VZwRxF1FheWYKeyMUZAYwWoyBtfD3n3w730OLduc1e52qrM5kiSCCoYFzPDyD9z6PuTvRolhxQWqCMro6j-EcI0Rq5EgWd0MSgcfY7BO7kPTqvAhEZRfLcjcgmSSytxC1heD3sbkwy_FNceIYvIJKGCB3Q</recordid><startdate>19920101</startdate><enddate>19920101</enddate><creator>Sun, Tong-sheng</creator><general>Oxford University Press</general><general>Published by Oxford University Press for the Society for Financial Studies</general><general>Oxford Publishing Limited (England)</general><scope>AAYXX</scope><scope>CITATION</scope><scope>JQCIK</scope><scope>K30</scope><scope>PAAUG</scope><scope>PAWHS</scope><scope>PAWZZ</scope><scope>PAXOH</scope><scope>PBHAV</scope><scope>PBQSW</scope><scope>PBYQZ</scope><scope>PCIWU</scope><scope>PCMID</scope><scope>PCZJX</scope><scope>PDGRG</scope><scope>PDWWI</scope><scope>PETMR</scope><scope>PFVGT</scope><scope>PGXDX</scope><scope>PIHIL</scope><scope>PISVA</scope><scope>PJCTQ</scope><scope>PJTMS</scope><scope>PLCHJ</scope><scope>PMHAD</scope><scope>PNQDJ</scope><scope>POUND</scope><scope>PPLAD</scope><scope>PQAPC</scope><scope>PQCAN</scope><scope>PQCMW</scope><scope>PQEME</scope><scope>PQHKH</scope><scope>PQMID</scope><scope>PQNCT</scope><scope>PQNET</scope><scope>PQSCT</scope><scope>PQSET</scope><scope>PSVJG</scope><scope>PVMQY</scope><scope>PZGFC</scope><scope>8BJ</scope><scope>FQK</scope><scope>JBE</scope></search><sort><creationdate>19920101</creationdate><title>Real and Nominal Interest Rates: A Discrete-Time Model and Its Continuous- Time Limit</title><author>Sun, Tong-sheng</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c332t-2de4f8226cae026f0d8c1f11fc303caadc74fb765316f748e625a2fdda03d8593</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>1992</creationdate><topic>Arbitrage</topic><topic>Bond market</topic><topic>Consumer Price Index</topic><topic>Consumption</topic><topic>Discounts</topic><topic>Economic growth rate</topic><topic>Economic modeling</topic><topic>Economic models</topic><topic>Endowment</topic><topic>Endowments</topic><topic>Equilibrium</topic><topic>Financial bonds</topic><topic>Financial economics</topic><topic>Growth rate</topic><topic>Hypotheses</topic><topic>Inflation rates</topic><topic>Interest rates</topic><topic>Nominal interest rates</topic><topic>Price levels</topic><topic>Risk premiums</topic><topic>Utility functions</topic><topic>Yield to maturity</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Sun, Tong-sheng</creatorcontrib><collection>CrossRef</collection><collection>Periodicals Index Online Segment 33</collection><collection>Periodicals Index Online</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - West</collection><collection>Primary Sources Access (Plan D) - International</collection><collection>Primary Sources Access &amp; Build (Plan A) - MEA</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - Midwest</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - Northeast</collection><collection>Primary Sources Access (Plan D) - Southeast</collection><collection>Primary Sources Access (Plan D) - North Central</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - Southeast</collection><collection>Primary Sources Access (Plan D) - South Central</collection><collection>Primary Sources Access &amp; Build (Plan A) - UK / I</collection><collection>Primary Sources Access (Plan D) - Canada</collection><collection>Primary Sources Access (Plan D) - EMEALA</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - North Central</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - South Central</collection><collection>Primary Sources Access &amp; Build (Plan A) - International</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - International</collection><collection>Primary Sources Access (Plan D) - West</collection><collection>Periodicals Index Online Segments 1-50</collection><collection>Primary Sources Access (Plan D) - APAC</collection><collection>Primary Sources Access (Plan D) - Midwest</collection><collection>Primary Sources Access (Plan D) - MEA</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - Canada</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - UK / I</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - EMEALA</collection><collection>Primary Sources Access &amp; Build (Plan A) - APAC</collection><collection>Primary Sources Access &amp; Build (Plan A) - Canada</collection><collection>Primary Sources Access &amp; Build (Plan A) - West</collection><collection>Primary Sources Access &amp; Build (Plan A) - EMEALA</collection><collection>Primary Sources Access (Plan D) - Northeast</collection><collection>Primary Sources Access &amp; Build (Plan A) - Midwest</collection><collection>Primary Sources Access &amp; Build (Plan A) - North Central</collection><collection>Primary Sources Access &amp; Build (Plan A) - Northeast</collection><collection>Primary Sources Access &amp; Build (Plan A) - South Central</collection><collection>Primary Sources Access &amp; Build (Plan A) - Southeast</collection><collection>Primary Sources Access (Plan D) - UK / I</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - APAC</collection><collection>Primary Sources Access—Foundation Edition (Plan E) - MEA</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>International Bibliography of the Social Sciences</collection><collection>International Bibliography of the Social Sciences</collection><jtitle>The Review of financial studies</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Sun, Tong-sheng</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>Real and Nominal Interest Rates: A Discrete-Time Model and Its Continuous- Time Limit</atitle><jtitle>The Review of financial studies</jtitle><date>1992-01-01</date><risdate>1992</risdate><volume>5</volume><issue>4</issue><spage>581</spage><epage>611</epage><pages>581-611</pages><issn>0893-9454</issn><eissn>1465-7368</eissn><abstract>I provide a general equilibrium theory of the term structure of real interest rates in a discrete-time economy. I derive the prices for one-period and two-period real bonds and a simple recursive formula for general k-period bonds, and prove that the price formula with appropriately specified parameters converges to that of the Cox, Ingersoll, and Ross model (1985). In addition, I consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy. Finally, I provide an illustrative empirical investigation of the model. The results indicate a significant correlation between the price level and the growth rate of consumption, which does not support the "money neutrality" assumption underlying Cox, Ingersoll, and Ross's nominal bond prices and related empirical studies, such as Gibbons and Ramaswamy (1992), Heston (1991), and Pearson and Sun (1991).</abstract><cop>New York, NY</cop><pub>Oxford University Press</pub><doi>10.1093/rfs/5.4.581</doi><tpages>31</tpages></addata></record>
fulltext fulltext
identifier ISSN: 0893-9454
ispartof The Review of financial studies, 1992-01, Vol.5 (4), p.581-611
issn 0893-9454
1465-7368
language eng
recordid cdi_proquest_miscellaneous_38485280
source EconLit s plnými texty; EBSCOhost Business Source Ultimate; International Bibliography of the Social Sciences (IBSS); Oxford University Press Archive; JSTOR
subjects Arbitrage
Bond market
Consumer Price Index
Consumption
Discounts
Economic growth rate
Economic modeling
Economic models
Endowment
Endowments
Equilibrium
Financial bonds
Financial economics
Growth rate
Hypotheses
Inflation rates
Interest rates
Nominal interest rates
Price levels
Risk premiums
Utility functions
Yield to maturity
title Real and Nominal Interest Rates: A Discrete-Time Model and Its Continuous- Time Limit
url http://sfxeu10.hosted.exlibrisgroup.com/loughborough?ctx_ver=Z39.88-2004&ctx_enc=info:ofi/enc:UTF-8&ctx_tim=2025-01-14T10%3A12%3A50IST&url_ver=Z39.88-2004&url_ctx_fmt=infofi/fmt:kev:mtx:ctx&rfr_id=info:sid/primo.exlibrisgroup.com:primo3-Article-jstor_proqu&rft_val_fmt=info:ofi/fmt:kev:mtx:journal&rft.genre=article&rft.atitle=Real%20and%20Nominal%20Interest%20Rates:%20A%20Discrete-Time%20Model%20and%20Its%20Continuous-%20Time%20Limit&rft.jtitle=The%20Review%20of%20financial%20studies&rft.au=Sun,%20Tong-sheng&rft.date=1992-01-01&rft.volume=5&rft.issue=4&rft.spage=581&rft.epage=611&rft.pages=581-611&rft.issn=0893-9454&rft.eissn=1465-7368&rft_id=info:doi/10.1093/rfs/5.4.581&rft_dat=%3Cjstor_proqu%3E2962142%3C/jstor_proqu%3E%3Cgrp_id%3Ecdi_FETCH-LOGICAL-c332t-2de4f8226cae026f0d8c1f11fc303caadc74fb765316f748e625a2fdda03d8593%3C/grp_id%3E%3Coa%3E%3C/oa%3E%3Curl%3E%3C/url%3E&rft_id=info:oai/&rft_pqid=1292159183&rft_id=info:pmid/&rft_jstor_id=2962142&rfr_iscdi=true