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Interest Rate Skewness and Biased Beliefs

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  • Chernov, Mikhail
  • Bauer, Michael

Abstract

The conditional skewness of Treasury yields is an important indicator of the risks to the macroeconomic outlook. Positive skewness signals upside risk to interest rates during periods of accommodative monetary policy and an upward-sloping yield curve, and vice versa. Skewness has substantial predictive power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and survey forecast errors for interest rates. The estimated expectational errors, or biases in beliefs, are quantitatively important for statistical bond risk premia. These findings are consistent with a heterogeneous-beliefs model where one of the agents is wrong about consumption growth

Suggested Citation

  • Chernov, Mikhail & Bauer, Michael, 2021. "Interest Rate Skewness and Biased Beliefs," CEPR Discussion Papers 16274, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:16274
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    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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