Speculation, risk premia and expectations in the yield curve
AbstractAn affine asset pricing model in which agents have rational but heterogeneous expectations about future asset prices is developed. We estimate the model using data on bond yields and individual survey responses from the Survey of Professional Forecasters and perform a novel three-way decomposition of bond yields into (i) average expectations about short rates (ii) risk premia and (iii) a speculative component due to heterogeneous expectations about the resale value of a bond. We prove that the speculative term must be orthogonal to public information in real time and therefore statistically distinct from risk premia. Empirically, the speculative component is quantitatively important, accounting for up to one percentage point of US yields. Furthermore, estimates of historical risk premia from the heterogeneous information model are less volatile than, and negatively correlated with, risk premia estimated using a standard Affine Gaussian Term Structure model.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1337.
Date of creation: Aug 2012
Date of revision: Nov 2013
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Web page: http://www.econ.upf.edu/
speculation; risk premia; yield curve;
Other versions of this item:
- Francisco Barillas & Kristoffer Nimark, 2013. "Speculation, Risk Premia and Expectations in the Yield Curve," Working Papers 659, Barcelona Graduate School of Economics.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-13 (All new papers)
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