Working Paper: NBER ID: w28954
Authors: Michael D. Bauer; Mikhail Chernov
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.
Keywords: interest rates; skewness; bond risk premia; biased beliefs
JEL Codes: E43; E44; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conditional skewness (C46) | excess returns on treasury bonds (G12) |
| conditional skewness (C46) | bond risk premia (G12) |
| expectational errors (D84) | bond risk premia (G12) |
| conditional skewness (C46) | interest rate predictions (E43) |
| changes in conditional skewness (C46) | interest rate movements (E43) |