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Term Structure Models and Differences in Beliefs

Andrea Buraschi

The University of Chicago; Imperial College Business School; Centre for Economic Policy Research (CEPR)

Paul Whelan

Copenhagen Business School

February 1, 2013

This paper studies the empirical implications of models with heterogeneous beliefs for the term structure of interest rates. When agents hold subjective beliefs they are naturally induced to trade which in turn generates endogenously time-varying return volatility. This channel has tight implications for equilibrium yield curves which we investigate empirically. We study a set of testable restrictions that help distinguish across myopic, speculative, and risk sharing models. Our results show that speculative models help to explain the joint dynamics of excess return predictability, realised volatility, compensation for volatility risk, and Treasury market trading volumes.

Number of Pages in PDF File: 57

Keywords: Fixed income, Term Structure, Difference in Beliefs, Heterogeneous Agent Economies

JEL Classification: D9, E3, E4, G12

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Date posted: July 17, 2011 ; Last revised: December 7, 2014

Suggested Citation

Buraschi, Andrea and Whelan, Paul, Term Structure Models and Differences in Beliefs (February 1, 2013). Available at SSRN: http://ssrn.com/abstract=1887644 or http://dx.doi.org/10.2139/ssrn.1887644

Contact Information

Andrea Buraschi
The University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
7738347123 (Phone)
HOME PAGE: http://www.andreaburaschi.com/

Chicago Booth School of Business Logo

Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
HOME PAGE: http://www.andreaburaschi.com/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Paul Whelan (Contact Author)
Copenhagen Business School ( email )
Copenhagen Business School
Finance Department
Copenhagen, DC 1854
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References:  71
Citations:  11

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