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Trend and cycle in bond premia

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Author Info

  • Monika Piazzesi
  • Martin Schneider

Abstract

Common statistical measures of bond risk premia are volatile and countercyclical. This paper uses survey data on interest rate forecasts to construct subjective bond risk premia. Subjective premia are less volatile and not very cyclical; instead they are high, only around the early 1980s. The reason for the discrepancy is that survey forecasts of interest rates are made as if both the level and the slope of the yield curve are more persistent than under common statistical models. The paper then proposes a consumption based asset pricing model with learning to explain jointly the difference between survey and statistical forecasts, and the evolution of subjective premia. Adaptive learning gives rise to inertia in forecasts, as well as changes in conditional volatility that help understand both features. ; This paper is an extension of Monika Piazzesi's and Martin Schneider's work while they were in the Research Department of the Federal Reserve Bank of Minneapolis.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 424.

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Date of creation: 2009
Date of revision:
Handle: RePEc:fip:fedmsr:424

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Related research

Keywords: Bonds;

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Cited by:
  1. Zhu, Xiaoneng, 2011. "Revisiting the expectations hypothesis: The Japanese term structure and regime shifts," Journal of Economics and Business, Elsevier, vol. 63(3), pages 237-249, May.
  2. Yu-chin Chen & Kwok Ping Tsang & Wen Jen Tsay, 2010. "Home Bias in Currency Forecasts," Working Papers e07-18, Virginia Polytechnic Institute and State University, Department of Economics.
  3. Zhu, Xiaoneng, 2011. "A note on the predictability of excess bond returns and regime shifts," Finance Research Letters, Elsevier, vol. 8(2), pages 101-109, June.
  4. Taeyoung Doh, 2008. "Long run risks in the term structure of interest rates: estimation," Research Working Paper RWP 08-11, Federal Reserve Bank of Kansas City.
  5. Kristoffer Nimark, 2012. "Speculative Dynamics in the Term Structure of Interest Rates," Working Papers 430, Barcelona Graduate School of Economics.

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