BFS 2002

Contributed Talk

Bond Market Clearing

Oldrich Alfons Vasicek

The paper gives a necessary and sufficient condition that must be satisfied by a model of the term structure of interest rates in order that an equilibrium economy exists with a bond market governed by that model. The condition is that the term structure model is arbitrage-free and that an optimal strategy of any risk-averse bond market investor has a finite expected utility. It is shown on the example of several models proposed in the literature that this condition is not always satisfied.