Abstract

http://ssrn.com/abstract=1887644
 
 

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Term Structure Models with Differences in Beliefs


Andrea Buraschi


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

Paul Whelan


Imperial College Business School

April 1, 2012


Abstract:     
This paper studies both theoretically and empirically the link between macroeconomic disagreement and bond markets. Using survey data, we construct proxies of macroeconomic disagreement and nd a number of novel results. First, heterogeneity in beliefs affect the price of risk so that belief dispersion regarding the real economy, inflation, and signals predict excess bond returns with R-squares between 21%- 43%. Second, disagreement explains bond volatilities with high statistical signi cance and R-square's of 26% in monthly projections. Third, while around half the information contained in the cross-section of expectations is spanned by the yield curve, there remains large unspanned components important for bond pricing. Fourth, disagreement also contains significant information on trading activity: belief dispersion at 1-year horizon drives up trade at the short end of the yield curve relative to trade at the long end.

Number of Pages in PDF File: 58

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: July 8, 2012

Suggested Citation

Buraschi, Andrea and Whelan, Paul, Term Structure Models with Differences in Beliefs (April 1, 2012). 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)
Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London SW7 2AZ, DC SW7 2AZ
United Kingdom
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