A Term Structure Model with Preferences for the Timing of Resolution of Uncertainty, Economic Theory
In this paper we present a model of the term structure of interest rates with imperfect information and stochastic differential utility, a form of non-additive recursive utility. A principal feature of recursive utility, that distinguishes it from time-separable expected utility, is its dependence on the timing of resolution of uncertainty. In our model, we parametrize the non-linearity of recursive utility in a way that corresponds to preferences for the timing of resolution. This way we show explicitly the dependence of prices on the rate of information, as a consequence of the nature of utilities. State prices and the term structure of interest rates are obtained in closed form, and are shown to have a form in which derivative asset pricing is tractable. Comparative statics relating to the dependence of the term structure on the rate of information are also discussed.
Darrell Duffie, Mark Schroder, Constantinos Skiadas
Duffie, Darrell, Mark Schroder, and Constantinos Skiadas. 1996. A Term Structure Model with Preferences for the Timing of Resolution of Uncertainty. Economic Theory. 9(1): 3-22.