Abstract

https://ssrn.com/abstract=1887644
 
 

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Speculation, Hedging, and Interest Rates


Andrea Buraschi


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

Paul Whelan


Copenhagen Business School

July 1, 2016


Abstract:     
We study the bond markets implications of a heterogeneous economy with low risk aversion agents who use different models to interpret economic shocks. We show analytically that the interaction of low risk aversion and differences in beliefs gives rise to speculative motives for trading that help rationalise several features of Treasury bond markets that traditional models find difficult to explain. Empirically, we test model predictions using a large dataset on beliefs about fundamentals and find that disagreement (i) lowers the unconditional risk-free rate and makes its dynamics pro-cyclical, (ii) raises the slope of the yield curve, and (iii) increase bond risk premia and makes its dynamics counter-cyclical.

Number of Pages in PDF File: 67

Keywords: Fixed income, Bond Risk Premia, Heterogeneous Agents, Speculation

JEL Classification: D9, E3, E4, G12


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Date posted: July 17, 2011 ; Last revised: January 4, 2017

Suggested Citation

Buraschi, Andrea and Whelan, Paul, Speculation, Hedging, and Interest Rates (July 1, 2016). Available at SSRN: https://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
Denmark
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