Interest rate curve in incomplete financial markets: modelling the impact of uncertainty.

Abstract

The purpose of this thesis is to investigate the effect of incomplete and uncertain financial markets on interest rates, namely by studying the impact on the interest rate curve caused by the introduction of some form of market uncertainty and the transition of the curve from a stationary equilibrium (with no uncertainty in financial markets) to another (characterized by uncertainty). To this end, this work first analyzes the Aiyagari-Bewley-Huggett heterogeneous agent model of income and wealth distribution in continuous time, focusing on the Bewley market clearing condition with a bond in zero net supply. After that, a generalization of the model is presented, in order to introduce uncertainty through the possibility for agents to invest also in a risky asset, besides the riskless investment in bond. In particular, this extended version is modelled within the framework of Mean Field Games and solved numerically using MATLAB codes.