IDEAS home Printed from https://ideas.repec.org/a/eee/ecofin/v79y2025ics1062940825000828.html
   My bibliography  Save this article

Misaligned expectations and bond term premium measures

Author

Listed:
  • Vázquez, Jesús

Abstract

This paper shows that inflation expectations and those embedded in short-term interest rate expectations as reported in the Survey of Professional Forecasters show evidence of misaligned expectations. This misalignment seems to have been substantial in recent times, featuring a low correlation between inflation and the policy rate. This empirical evidence motivates an alternative explanation, based on uncertainty rather than risk, of the bond term premium measures found in the literature. This paper estimates an expectational term premium driven by misaligned short-term interest rate expectations from a behavioral DSGE model that introduces model uncertainty by assuming adaptive learning with discretionary beliefs. The estimated 10-year expectational term premium shares important features with the corresponding term premium measures obtained using no-arbitrage affine term structure models. Thus, the expectational term premium is sizable, highly persistent, mildly countercyclical, and highly correlated with those term premium measures in the most recent period studied. In short, a potential misalignment of short-term interest expectations with inflation expectations provides an important channel for explaining the bond premium lately.

Suggested Citation

  • Vázquez, Jesús, 2025. "Misaligned expectations and bond term premium measures," The North American Journal of Economics and Finance, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:ecofin:v:79:y:2025:i:c:s1062940825000828
    DOI: 10.1016/j.najef.2025.102442
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062940825000828
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.najef.2025.102442?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Expectation misalignment; Expectational term premium; Uncertainty; Adaptive learning with discretionary beliefs;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecofin:v:79:y:2025:i:c:s1062940825000828. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620163 .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.