publication . Report . Preprint . 1983

Why Are Real Interest Rates So High?

Zvi Bodie; Alex Kane; Robert L. McDonald;
Open Access
  • Published: 01 Jun 1983
  • Publisher: National Bureau of Economic Research
This paper applies the Capital Asset Pricing Model to help explain the anomalous behavior of real interest rates during the last several years. Specifically,we are able to show that the increased volatility of bond prices since the change in Federal Reserve operating procedure in October 1979 has substantially increased the required real risk premium on long term bonds. We also consider and reject the possibility that increased risk alone accounts for the recent increase in the short-term real rate. Finally, we use the model to simulate the financial effects of a Federal debt maturity management operation.
free text keywords: Risk-free interest rate, Interest rate risk, Econometrics, Risk premium, Financial economics, Rational pricing, Real interest rate, Consumption-based capital asset pricing model, Business, Rendleman–Bartter model, Interest rate, media_common.quotation_subject, media_common

e c r u o S Barro, R. 1974. Are Government Bonds Net Wealth? Journal of Political Economy.

Bodie, Z., Kane, A., and McDonald, R. 1983. The Role of Bonds in Investors' Portfolios. NBER Working Paper No. 1091. [OpenAIRE]

Bodie, Z. 1982. Inflation Risk and Capital Market Equilibrium. The Financial Review. May.

Cox, J., Ingersoll, J, and Ross, S. 1981. A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates. Journal of Finance. September. [OpenAIRE]

___________ 1978. A Theory ofthe Term tructure of Interest Rates. Stanford University Working Paper. Unpublished.

Friedman, B. 1981. Debt Management Policy, Interest Rates, and Economic Activity. NBER Working Paper No. 830.

Friend, I. and Blume, M. 1975. The Demand for Risky Assets. American Economic Review. December. [OpenAIRE]

Friend, I. and Hasbrouck, J. 1982. Effect of Inflation on the Profitability and Valuation of U.S. Corporations. Proceedings of the Conference on Savings, Investment and Capital Markets in an Inflationary Environment, Szego and Sarnat, eds., Ballinger, 1982.

Grossman, S. and Shiller, R. 1981. The Determinants of the Variability of Stock Market Prices. American Economic Review. May.

Ibbotson, R.G. and Sinquefleld, R.A. 1982. Stocks, Bonds, Bills and Inflation: The Past and the Future. Financial Analyst's Research Foundation, Charlottesville, Va.

Powered by OpenAIRE Open Research Graph
Any information missing or wrong?Report an Issue
publication . Report . Preprint . 1983

Why Are Real Interest Rates So High?

Zvi Bodie; Alex Kane; Robert L. McDonald;