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Speculation and the Bond Market: An Empirical No-arbitrage Framework

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  • Nimark, Kristoffer P
  • Barillas, Francisco

Abstract

An affine no-arbitrage asset pricing framework is developed that allows for agents to have rational but heterogeneous expectations. The framework can match both bond yields and the observed dispersion of yield expectations in survey data. Heterogenous information introduces a speculative component in bond prices that (i) is statistically distinct from classical components such as risk-premia and expectations about future short rates and (ii) quantitatively important, at times accounting for up to 125 basis points of US yields. Allowing for heterogenous expectations also changes the estimated relative importance of risk-premia and expectations about future short rates in historical bond yields compared to a standard affine model. The framework imposes weaker restrictions than existing heterogenous information asset pricing models and is thus well-suited to empirically quantify the importance of relaxing the common information assumption.

Suggested Citation

  • Nimark, Kristoffer P & Barillas, Francisco, 2015. "Speculation and the Bond Market: An Empirical No-arbitrage Framework," CEPR Discussion Papers 10892, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10892
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    References listed on IDEAS

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    Cited by:

    1. Ethan Struby, 2018. "Macroeconomic Disagreement in Treasury Yields," Working Papers 2018-04, Carleton College, Department of Economics.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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