The Yield Curve: Terms of Endearment or Terms of Endowment

By solving an incomplete-markets model of multiperiod bond pricing backwards, we show that the mean and autocorrelation properties of the term premiums in the yield curve can be a reflection of the temporal distribution of uninsurable income shocks, i.e., the term structure of endowments. Moreover, agents can exhibit an equilibrium preferred habitat in bond maturities in the absence of binding portfolio restrictions