Speculation and the Bond Market: An Empirical No-Arbitrage Framework
55 Pages Posted: 17 Jul 2012 Last revised: 13 Apr 2017
Date Written: April 13, 2017
An affine no-arbitrage asset pricing framework is developed that allows for agents to have rational but heterogeneous expectations. The framework can match both bond yields and the observed dispersion of yield expectations in survey data. heterogeneous information introduces a speculative component in bond prices that (i) is statistically distinct from classical components such as risk-premia and expectations about future short rates and (ii) quantitatively important, at times accounting for up to 125 basis points of US yields. Allowing for heterogeneous expectations also changes the estimated relative importance of risk-premia and expectations about future short rates in historical bond yields compared to a standard affine model. The framework imposes weaker restrictions than existing heterogeneous information asset pricing models and is thus well-suited to empirically quantify the importance of relaxing the common information assumption.
Keywords: Asset Pricing Theory, Private Information, Term Sturcture of Interest Rates
JEL Classification: G12, E43
Suggested Citation: Suggested Citation