The Term Structure of Interest Rates in a Partially Observable Economy


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43 Scopus citations


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. 1989 The American Finance Association

Original languageEnglish
Pages (from-to)789-812
Number of pages24
JournalJournal of Finance
Issue number3
StatePublished - 1 Jan 1989

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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