Advanced Search
MyIDEAS: Login to save this paper or follow this series

Speculative dynamics in the term structure of interest rates

Contents:

Author Info

Abstract

When long maturity bonds are traded frequently and rational traders have non-nested information sets, speculative behavior arises. Using a term structure model displaying such speculative behavior, this paper demonstrates that (i) dispersion of expectations about future short rates is sufficient for individual traders to systematically predict excess returns and (ii) the new term structure dynamics driven by speculative trade is orthogonal to public information in real time, but (iii) can nevertheless be quantified using only publicly available yield data. Speculative dynamics are found to be quantitatively important, potentially accounting for a substantial fraction of the variation of US bond yields.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.econ.upf.edu/docs/papers/downloads/1194.pdf
File Function: Whole Paper
Download Restriction: no

Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1194.

as in new window
Length:
Date of creation: Dec 2009
Date of revision: Sep 2012
Handle: RePEc:upf:upfgen:1194

Contact details of provider:
Web page: http://www.econ.upf.edu/

Related research

Keywords: Term structure of interest rates; Speculative dynamics; Excess returns; Nonnested information; Private information.;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Cespa, Giovanni & Vives, Xavier, 2009. "Dynamic Trading and Asset Prices: Keynes vs. Hayek," CEPR Discussion Papers 7506, C.E.P.R. Discussion Papers.
  2. Eric van Wincoop & Philippe Bacchetta, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," NBER Working Papers 9498, National Bureau of Economic Research, Inc.
  3. Kristoffer Nimark, 2009. "A low dimensional Kalman filter for systems with lagged observables," Economics Working Papers 1182, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
  5. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-57, May.
  6. Sargent, Thomas J., 1991. "Equilibrium with signal extraction from endogenous variables," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 245-273, April.
  7. Kenneth Kasa, 1995. "Signal extraction and the propagation of business cycles," Working Papers in Applied Economic Theory 95-14, Federal Reserve Bank of San Francisco.
  8. Philippe Bacchetta & Elmar Mertens & Eric van Wincoop, 2006. "Predictability in Financial Markets: What Do Survey Expectations Tell Us?," Working Papers 102006, Hong Kong Institute for Monetary Research.
  9. Kristoffer Nimark, 2007. "Dynamic higher order expectations," Economics Working Papers 1118, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2011.
  10. Refet S. G├╝rkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
  11. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," Working Papers 102, Department of Economics, College of William and Mary.
  12. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April.
  13. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
  14. Andrea Buraschi & Alexei Jiltsov, 2006. "Model Uncertainty and Option Markets with Heterogeneous Beliefs," Journal of Finance, American Finance Association, vol. 61(6), pages 2841-2897, December.
  15. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
  16. David K. Backus & Allan W. Gregory & Stanley E. Zin, 1986. "Risk Premiums in the Term Structure : Evidence from Artificial Economies," Working Papers 665, Queen's University, Department of Economics.
  17. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-85, May.
  18. Jon Faust & John H. Rogers & Shing-Yi B. Wang & Jonathan H. Wright, 2003. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," International Finance Discussion Papers 784, Board of Governors of the Federal Reserve System (U.S.).
  19. George-Marios Angeletos & Alessandro Pavan, 2008. "Policy with Dispersed Information," Carlo Alberto Notebooks 86, Collegio Carlo Alberto.
  20. Joseph G. Pearlman & Thomas J. Sargent, 2005. "Knowing the Forecasts of Others," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 480-497, April.
  21. Gregory R. Duffee, 2011. "Information in (and not in) the Term Structure," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 2895-2934.
  22. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  23. Backus, David & Foresi, Silverio & Mozumdar, Abon & Wu, Liuren, 2001. "Predictable changes in yields and forward rates," Journal of Financial Economics, Elsevier, vol. 59(3), pages 281-311, March.
  24. Michael Gallmeyer & Burton Hollifield, 2008. "An Examination of Heterogeneous Beliefs with a Short-Sale Constraint in a Dynamic Economy," Review of Finance, European Finance Association, vol. 12(2), pages 323-364.
  25. Monika Piazzesi & Martin Schneider, 2009. "Trend and cycle in bond premia," Staff Report 424, Federal Reserve Bank of Minneapolis.
  26. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Badarinza, Cristian & Buchmann, Marco, 2011. "Macroeconomic vulnerability and disagreement in expectations," Working Paper Series 1407, European Central Bank.
  2. Barillas, Francisco & Nimark, Kristoffer P, 2013. "Speculation, Risk Premia and Expectations in the Yield Curve," CEPR Discussion Papers 9755, C.E.P.R. Discussion Papers.
  3. Hatchondo, Juan Carlos & Krusell, Per & Schneider, Martin, 2014. "Asset Trading and Valuation with Uncertain Exposure," Working Paper 14-5, Federal Reserve Bank of Richmond.
  4. Andrade, Philippe & Crump, Richard K. & Eusepi, Stefano & Moench, Emanuel, 2013. "Noisy information and fundamental disagreement," Staff Reports 655, Federal Reserve Bank of New York.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:1194. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.