Using a discrete time general equilibrium model of the term structure of interest rates, we seek to determine the sign of the liquidity and solidity premiums—which jointly characterize the term structure—depending on the nature and structure of the uncertainty. We choose to study two different structures. In the first one, associated with a wealth effect, the messages that the agents can receive only reveal the present state of the economy. In the second one, associated with an information effect, the messages bring an information about the futur state of the economy. We define a polarized information as an information which can be unambiguously viewed as a good or a bad news. We study these effects in different types of economy—from an exchange economy to a production economy—using some quite general assumptions on the individuals' preferences. In doing so, we reexamine and extend the work of Woodward (1983), and of Benninga and Protopapadakis (1986). In particular, using the concept of polarized information, we show that the comparison between the short and long bonds, from the point of view of risk management, does not strongly depend on the availability of a production technology.
Finance, vol. 17, n. 1, July 1996, pp. 7–29