Working Paper: CEPR ID: DP9755
Authors: Francisco Barillas; Kristoffer P. Nimark
Abstract: An affine asset pricing model in which agents have rational but heterogeneous expectations about future asset prices is developed. We estimate the model using data on bond yields and individual survey responses from the Survey of Professional Forecasters and perform a novel three-way decomposition of bond yields into (i) average expectations about short rates (ii) risk premia and (iii) a speculative component due to heterogeneous expectations about the resale value of a bond. We prove that the speculative term must be orthogonal to public information in real time and therefore statistically distinct from risk premia. Empirically, the speculative component is quantitatively important, accounting for up to one percentage point of US yields. Furthermore, estimates of historical risk premia from the heterogeneous information model are less volatile than, and negatively correlated with, risk premia estimated using a standard Affine Gaussian Term Structure model.
Keywords: heterogeneous information; speculation; survey data; term structure of interest rates
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| speculative component in bond yields (E43) | alters cyclical properties of risk premia (E32) |
| speculative behavior (D84) | less volatility of historical risk premia (C58) |
| speculative behavior (D84) | negative correlation with risk premia from standard affine Gaussian term structure model (G19) |
| speculative term must be orthogonal to public information in real-time (D84) | agents cannot predict forecast errors of other agents using publicly available data (D89) |
| heterogeneous expectations about resale value of bonds (D84) | speculative component in bond yields (E43) |