Working Paper: CEPR ID: DP10892
Authors: Francisco Barillas; Kristoffer Nimark
Abstract: An affine no-arbitrage asset pricing framework is developed that allows for agents to have rational but heterogeneous expectations. The framework can match both bond yields and the observed dispersion of yield expectations in survey data. Heterogenous information introduces a speculative component in bond prices that (i) is statistically distinct from classical components such as risk-premia and expectations about future short rates and (ii) quantitatively important, at times accounting for up to 125 basis points of US yields. Allowing for heterogenous expectations also changes the estimated relative importance of risk-premia and expectations about future short rates in historical bond yields compared to a standard affine model. The framework imposes weaker restrictions than existing heterogenous information asset pricing models and is thus well-suited to empirically quantify the importance of relaxing the common information assumption.
Keywords: bond market; heterogeneous expectations; speculation; no-arbitrage framework
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneous information (D89) | speculative component in bond prices (G12) |
| speculative component in bond prices (G12) | bond yields (E43) |
| heterogeneous expectations (D84) | speculative component in bond prices (G12) |
| heterogeneous expectations (D84) | bond yields (G12) |
| risk premia (G22) | bond yields (G12) |
| future short rate expectations (E43) | bond yields (G12) |