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Speculative dynamics in the term structure of interest rates

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  • Kristoffer Nimark

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.

Suggested Citation

  • Kristoffer Nimark, 2009. "Speculative dynamics in the term structure of interest rates," Economics Working Papers 1194, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2012.
  • Handle: RePEc:upf:upfgen:1194
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    References listed on IDEAS

    as
    1. Kristoffer Nimark, 2007. "Dynamic higher order expectations," Economics Working Papers 1118, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2011.
    2. Bacchetta, Philippe & Mertens, Elmar & van Wincoop, Eric, 2009. "Predictability in financial markets: What do survey expectations tell us?," Journal of International Money and Finance, Elsevier, vol. 28(3), pages 406-426, April.
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    Cited by:

    1. Francisco Barillas & Kristoffer Nimark, 2012. "Speculation, risk premia and expectations in the yield curve," Economics Working Papers 1337, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2013.
    2. Andrade, Philippe & Crump, Richard K. & Eusepi, Stefano & Moench, Emanuel, 2016. "Fundamental disagreement," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 106-128.
    3. Badarinza, Cristian & Gross, Marco, 2011. "Macroeconomic vulnerability and disagreement in expectations," Working Paper Series 1407, European Central Bank.
    4. Nimark, Kristoffer P., 2015. "A low dimensional Kalman filter for systems with lagged states in the measurement equation," Economics Letters, Elsevier, vol. 127(C), pages 10-13.
    5. Hatchondo, Juan Carlos & Krusell, Per & Schneider, Martin, 2014. "Asset Trading and Valuation with Uncertain Exposure," Working Paper 14-5, Federal Reserve Bank of Richmond.
    6. Rajnish Mehra & Arunima Sinha, 2016. "The Term Structure of Interest Rates in India," NBER Working Papers 22020, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

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

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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