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- Title
INTEREST RATES, PORTFOLIO BEHAVIOR, AND MARKETABLE GOVERNMENT SECURITIES.
- Authors
TERRELL, WILLIAM T.; FRAZER JR., WILLIAM J.
- Abstract
An increase (decrease) in a short- or long-term rate of interest is tied to conventional supply-demand-quantity notions in received literature on the term structure. In that literature there are explicit or implicit references to an increase in the demand (supply) for the relevant type funds relative to their supply (demand), all as if quantities were flowing into and out of the market in accordance with such changes and as if some demand (supply) locus of points were shifting along a locus of points comprising a supply-quantity (demand-quantity) relation. We have suggested instead a partial and sometimes predominant role for expectations and adjustments in yields and prices that occur independently of supply-demand-quantity notions. Suppliers and users of funds (traders) have periodic equality of foresight in this view. They, thus, appear to partially and sometimes significantly adjust the yields and prices at which security transactions are effected in accordance with future prospects (e.g., the expected rate of change in the average of prices for the current output of goods and services), even while maintaining relatively stable maturity profiles. All of this occurs such that the yield structure undergoes significant changes independently of the quantities brought to or withdrawn from the market. The theory and evidence supporting the present view vis-a-vis others concern (1) the liquidity-hedging motive as a major determinant of maturity distributions of portfolios of major investor groups, and (2) the occurrence over time of relatively stable maturity distributions simultaneously with a relatively volatile term structure of interest rates. One might say that the policies governing portfolio selection are of a longer run nature, and that expectational influences on security prices and interest rates, as subsumed under our equality of foresight principle, are of a shorter run nature.
- Subjects
INTEREST rates; PORTFOLIO management (Investments); GOVERNMENT securities; LIQUIDITY (Economics); SECURITIES; PUBLIC debts
- Publication
Journal of Finance (Wiley-Blackwell), 1972, Vol 27, Issue 1, p1
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1972.tb00616.x