"Uncertain Times Ahead"
Publication type: Working paper
Periods of economic crisis are often accompanied or followed by periods of uncertain inflation threads. The current financial crisis is the newest example of uncertain inflation times that lie ahead. This paper extends work of Andersen, Hansen, and Sargent (2003). It derives and estimates a general equilibrium model that prices bonds and bond options. Periods of increased uncertainty are not only periods of higher term spreads in the bond market but also periods of higher bond option implied volatilities.
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