Speculation, Sentiment, and Interest Rates

57 Pages Posted: 17 Jul 2011 Last revised: 2 Nov 2018

See all articles by Andrea Buraschi

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Paul Whelan

Copenhagen Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2018

Abstract

We compare bond markets implications of speculation versus hedging channels in heterogeneous agents economies. Treasuries command a significant risk premium when optimistic agents speculate by leveraging their positions using bond markets. Disagreement drives a wedge between marginal agent vs. econometrician beliefs (sentiment). When speculative demands dominate, the interaction between belief heterogeneity and sentiment helps rationalize several puzzling characteristics of Treasury markets. Empirically, we test model predictions and find that larger disagreement (i) lowers the unconditional risk-free rate, (ii) raises the slope of the yield curve; and (iii) with positive sentiment increases bond risk premia and makes its dynamics counter-cyclical.

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

JEL Classification: D9, E3, E4, G12

Suggested Citation

Buraschi, Andrea and Whelan, Paul, Speculation, Sentiment, and Interest Rates (February 1, 2018). Available at SSRN: https://ssrn.com/abstract=1887644 or http://dx.doi.org/10.2139/ssrn.1887644

Andrea Buraschi

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)

London
United Kingdom

Paul Whelan (Contact Author)

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854
Denmark

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