TERM PREMIA IN A SIMPLE TERM STRUCTURE MODEL

The present paper is an extension of Stiglitz's (1970) analysis. We use variations of his original model in an attempt to relate his contribution to the more recent literature. Our main purpose is to determine the nature of the term premium implied by various forms of the utility maximization hypothesis. Our focus is primarily on what Cox, Ingersoll, and Ross (CIR) (1981) call the returns to maturity expectation hypothesis, although we also investigate the local expectation hypothesis, which is the central focus of the analysis in CIR (1981). We study the conditions under which this hypothesis holds, and when it does not hold, we attempt to determine the direction of the resulting inequality. We are able to obtain results for the case in which the demand for long bonds is positive and to compare these results to others obtained when long bond demand is zero, the case studied in the recent literature.