Working Paper: CEPR ID: DP15122
Authors: Shuo Cao; Richard K. Crump; Stefano Eusepi; Emanuel Moench
Abstract: Using a unique dataset of individual professional forecasts we document disagreement aboutthe future path of monetary policy particularly at longer horizons. The stark differences inshort rate forecasts imply strong disagreement about the risk-return trade-off of longer-termbonds. Longer-horizon short rate disagreement co-moves with term premiums. We estimate anaffine term structure model in which investors hold heterogeneous beliefs about the long-runlevel of rates. Our model fits Treasury yields and the short rate paths predicted by differentgroups of investors and thus matches the observed differences in expected return profiles.Investors who correctly anticipated the secular decline in rates became increasingly importantfor the marginal pricing of risk in the Treasury market. Accounting for heterogeneity ininvestment performance eliminates the downward trend in the term premium.
Keywords: disagreement; heterogeneous beliefs; noisy information; speculation; survey forecasts; yield curve; term premium
JEL Codes: D83; D84; E43; G10; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disagreement about future short rates (E43) | risk-return tradeoff of longer-term bonds (G12) |
| longer horizon short rate disagreement (E43) | term premiums (G12) |
| heterogeneous beliefs about the long-run level of rates (E43) | bond pricing (G12) |
| investor expectations (D84) | market dynamics (D49) |
| composition of investors and their beliefs (G41) | observed term premiums (E43) |