Speculation, Sentiment, and Interest Rates

71 Pages Posted: 17 Jul 2011 Last revised: 14 Mar 2018

Andrea Buraschi

University of Chicago - Booth School of Business; 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


We study bond markets implications of heterogeneous economies where low risk aversion agents use different models to interpret economic shocks. The interaction of large belief heterogeneity and positive sentiment increases speculative trading that helps rationalizing several features of Treasury bond markets traditionally difficult to be explained. Empirically, we test model predictions using a large dataset on beliefs about fundamentals and find that larger disagreement (i) lowers the unconditional risk-free rate and makes its dynamics pro-cyclical, (ii) raises the slope of the yield curve, and, the interaction with positive sentiment, (iii) 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

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
7738347123 (Phone)

HOME PAGE: http://www.andreaburaschi.com/

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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