Testing the Preferred-Habitat Theory

Till Strohsal
Testing the Preferred-Habitat Theory: The Role ofTime-Varying Risk Aversion Abstract: This paper examines the preferred-habitat theory under time-varying risk aversion. The predicted positive relation between the term spread and relative supply of longer-term debt is stronger when risk aversion is high. To capture this effect, a time-varying coefficient model is introduced and applied to German bond data. The results support the theoretical predictions and indicate substantial time variation: under high risk aversion, yield spreads react...
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