Term Structure Models and Differences in Beliefs
The University of Chicago; Imperial College Business School; Centre for Economic Policy Research (CEPR)
Imperial College 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
Date posted: July 17, 2011 ; Last revised: December 7, 2014
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