A Theory of the Term Structure of Interest Rates Under Non-expected Intertemporal Preferences

Abstract

This paper presents general equilibrium term structure models under

a non-expected intertemporal utdity funchon, in which two disparate

preference elements - intertemporal substitution and risk aversion -

are disentangled. One major finding is that in a risk averse production

economy, bond prices are independent of intertemporal substitution

and thus separating the two preference components becomes totally

irrelevant. The models produce several other results that are contrasted

with those found in the exlstmg literature.