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Interest Rate Skewness and Biased Beliefs

Author

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  • MICHAEL BAUER
  • MIKHAIL CHERNOV

Abstract

Conditional skewness of Treasury yields is an important indicator of the risks to the macroeconomic outlook. Positive skewness signals upside risk to interest rates during periods of accommodative monetary policy and an upward‐sloping yield curve, and vice versa. Skewness has substantial predictive power for future bond excess returns, high‐frequency interest rate changes around Federal Open Market Committee announcements, and survey forecast errors for interest rates. The estimated expectational errors, or biases in beliefs, are quantitatively important for statistical bond risk premia. These findings are consistent with a heterogeneous‐beliefs model in which one of the agents is wrong about consumption growth.

Suggested Citation

  • Michael Bauer & Mikhail Chernov, 2024. "Interest Rate Skewness and Biased Beliefs," Journal of Finance, American Finance Association, vol. 79(1), pages 173-217, February.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:1:p:173-217
    DOI: 10.1111/jofi.13276
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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