The term structure of interest rates: Bounded or falling?

David Feldman

Research output: Contribution to journalArticlepeer-review

10 Scopus citations


This short paper resolves an apparent contradiction between Feldman's (1989) and Riedel's (2000) equilibrium models of the term structure of interest rates under incomplete information. Feldman (1989) showed that in an incomplete information version of Cox, Ingersoll, and Ross (1985), where the stochastic productivity factors are unobservable, equilibrium term structures are "interior" and bounded. Interestingly, Riedel (2000) showed that an incomplete information version of Lucas (1978), with an unobservable constant growth rate, induces a "corner" unbounded equilibrium term structure: it decreases to negative infinity. This paper defines constant and stochastic asymptotic moments, clarifies the apparent conflict between Feldman's and Riedel's equilibria, and discusses implications. Because productivity and growth rates are not directly observable in the real world, the question we answer is of particular relevance.

Original languageEnglish
Pages (from-to)103-113
Number of pages11
JournalEuropean Finance Review
Issue number1
StatePublished - 1 Dec 2003


  • Constant/stochastic asymptotic moments
  • Equilibrium asset pricing
  • Incomplete information
  • Term structure of interest rates

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (all)


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