简介
We model the term structure of interest rates that results from the interaction between
investors with preferences for specific maturities and risk-averse arbitrageurs. Shocks to the
short rate are transmitted to long rates through arbitrageurs’ carry trades. Arbitrageurs earn
rents from transmitting the shocks, through bond risk premia that relate positively to the slope
of the term structure. When the short rate is the only risk factor, changes in investor demand
have the same relative effect on interest rates across maturities regardless of the maturities
where they originate. When investor demand is also stochastic, demand effects become more
localized. A calibration indicates significant localization, and high volatility and price-elasticity
of investor demand.


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