By Frank Riedel
Real international traders range of their tastes and attitudes and so they should not have, usually, ideal information regarding the long run customers of the financial system. such a lot theoretical types, even though, suppose on the contrary that traders are homogeneous and completely expert in regards to the industry. during this booklet, an try is made to beat those shortcomings. In 3 varied case reports, the impact of heterogeneous time personal tastes, heterogeneous ideals and imperfect information regarding the economy's progress at the time period constitution of rates of interest are studied. The preliminary bankruptcy offers an advent to the idea of economic markets in non-stop time less than imperfect details and establishes the life of an equilibrium with whole markets.
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Additional info for Imperfect Information and Investor Heterogeneity in the Bond Market
22) 28 1. Equilibrium with Imperfect Information Proof. By the separability of the utilities U i 2. AiUi(d i ) = E faT 2. (Ai Zl)ui(t, dD dt and it is clear that it is sufficient to maximize pointwise under the integral. Fix wand set oc i = Ai zl (w). 3), the nonnegativity constraint is not binding. 19). 21) are the first order conditions for this problem and determine the solutions yi(t, x, oc) and v(t, x, oc). The implicit function theorem yields the smoothness in t, x and oc required. Now, v (t, x, oc) = L OCiUi(t, yi(t, x, oc» is continuously differentiable.
I). 4 Existence of an Arrow-Debreu Equilibrium bi(i\) =E f: (/)(i\)t(ci(i\)t - eD dt . 25) If bi(i\) units of money are given to or taken from agent i, then she is able to afford ci(i\). Note that the sum of payments is Li bi(i\) = O. 1. Let i\ :~ O. 25). Proof. The market clears by definition of c(i\). The transfer payment bi(i\) ensures that agent i can afford the consumption stream ci(i\). It remains to show the optimality of ci(i\) for agent i. This is done by a standard Lagrange argument. Assume that dEL is budget-feasible for agent i who has obtained the transfer payment bi(i\), 'Y (i\) (d) :::; 'Y (i\) (e J ) + b i (i\) = 'Y (i\) (c i (i\) ) .
Modigliani and Sutch were primarily concerned with an empirical investigation of the effects of a particular policy of the US government and Federal Reserve, "Operation Twist", which aimed at "twisting" the yield curve by raising the yield of bonds with short term to maturity and lowering simultaneously long-term rates. It was believed that this policy would help to reduce the balance-of-payments problem of the US. In order to give a rationale for the linear model they estimated, they reviewed the existing theories of the term structure, mainly the Expectations and the Liquidity Premium Hypothesis, and they developed their own theory, which has become known under the name of 'Preferred Habitat Theory'.
Imperfect Information and Investor Heterogeneity in the Bond Market by Frank Riedel