The Role of Bounded Rationality in Macro-Finance Affine Term-Structure Models
AbstractOur goal in this paper is two-fold. First, we develop a class of term structure models that allow for the role of bounded rationality by incorporating either information-processing constraint or fear for mis-specification into affine term structure models. We indentify a set of sufficient conditions to generate the observational equivalence between affine term-structure models with rational inattention and a fear for model misspecification. The presence of bounded rationality creates a new additional factor that is not spanned by conventional factors such as level, slope, and curvature factors. Second, our empirical results indicate that substantial amounts of information capacity constraint and robustness preference for model misspecification are needed to explain the observed behavior of yields.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 44212.
Date of creation: 01 Oct 2012
Date of revision:
Rational Inattention; Robustness; Affine Term Structure Models; No-Arbitrage;
Other versions of this item:
- Tack Yun & Eunmi Ko & Jinsook Kim, 2013. "The Role of Bounded Rationality in Macro-Finance Affine Term-Structure Models," 2013 Meeting Papers 527, Society for Economic Dynamics.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
- NEP-MAC-2013-02-16 (Macroeconomics)
- NEP-ORE-2013-02-16 (Operations Research)
- NEP-UPT-2013-02-16 (Utility Models & Prospect Theory)
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