Equilibrium interest rates and multiperiod bonds in a partially observable economy

Article Abstract:

Research hypothesizing a production and exchange economy having several realized outputs but only one source of nondiversifiable risk, which is unobservable, indicates that consumers determine equilibrium demands and prices by estimating the unobservable investment opportunities' return factor, that equilibrium spot rates are actually the best estimates for such unobservable factors, and that default-free bonds may be the optimal hedge against unobservable changes in investment factors. Six assumptions and three propositions affect the solution of the research model that gives rise to these conclusions. The conclusions of the research are applied to both fully observable economies and partially observable economies.

Economic aspects, Securities, Securities prices, Bonds, Bonds (Securities)

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Optimal portfolio choice under incomplete information

Article Abstract:

Asset pricing models assume that economic variables can be observed; since this is seldom true in actual practice, investment analysts must rely on estimations of expected returns on investment when making investment decisions. An analysis of estimation processes and the performance of investments identifies: (1) the procedures used, (2) the difference between filtering and control processes, and (3) the impact of estimation errors. Estimators of rates of return are shown to be inconsistent and the effects of estimation errors, though varying, should not be ignored. In a discussion of the research paper presented, the paper's main tenets are reviewed (and lauded), and possible related research topics are identified.

Management, Conferences, meetings and seminars, Valuation, Return on investment, Investment analysis, Securities analysis, Assets (Accounting), Rate of return, American Finance Association

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The term structure of interest rates in a partially observable economy

Article Abstract:

This paper investigates the term structure of interest rates in a multiperiod production and exchange economy with incomplete information. Unable to observe their stochastic investment opportunities, investors engage in dynamic Bayesian inference. This results in the endogenous identification of a more complex production function which generates a richer term structure, resembling the one that actual market prices imply. In addition, this paper introduces a characteristic function of the term structure and demonstrates that, in contrast with a fully observable economy, the widely investigated expectations hypothesis holds true only if interest rates are nonstochastic. (Reprinted by permission of the publisher.)

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