A Consumption-Based Model Of The Term Structure Of Interest Rates

As with the marketization of interest rate and the increasing expansion of the national debt market, the term structure of interest rate behind the national debt is of cardinal significance. It lays the basis of asset pricing, risk management and hedging. It is also the analytic tool of monetary policy made by the central bank. Recently,the study of consumption led in the asset pricing model is very poplar. For one thing, consumption plays an increasingly important role in the national economy. For another, the theoretical circle has no way to explain two mysteries of asset pricing----the riddle of equity premium and the riddle of risk-free interest rate. Researches in hand shows that the riddle of equity premium can be solved to some degree by introducing the concept of habit formation into asset pricing model. However, most of the existent study aims at stock pricing. The development of the national debt market tells us that the study of the influence of consumption cast on bond pricing can never be neglected.In this paper,we first analyze the background significance of the study of Term Structure of Interest Rate model based on habit formation and the status quo concerned this subject overseas and at home. Then, we elaborate the theory of Term Structure of Interest Rate and the theory of habit formation in Chapter Ⅱ. By putting the element of habit formation into utility function and introducing the concept of free parameters, we will make surplus consumption cast net impact on risk-free interest rate. And the risk-free interest rate and risk premium for bonds in variation with time can be got. As a result, the model of Term Structure of Interest Rate based on habit formation can be deduced. Meanwhile,an exogeneitic inflation process was introduced and evaluated. The last part is about the empirical study. The empirical study shows that the average and standard deviation of short-term bond and long-term bond can be fitted by the model by way of introducing the free parameter in the model, i.e the surplus consumption exerts net effect on risk-free interest rate, and the yields of the short-term bond and long-term bond is the decreasing function of surplus consumption. The risk premium for bond varies with the time is also found by the empirical result. The model of this paper testifies the failure of the Expectancy Hypothesis.