Speculation, Risk Premia and Expectations in the Yield Curve

61 Pages Posted: 25 Nov 2013

See all articles by Francisco Barillas

Francisco Barillas

University of New South Wales

Kristoffer Nimark

Cornell University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2013

Abstract

An affine asset pricing model in which agents have rational but heterogeneous expectations about future asset prices is developed. We estimate the model using data on bond yields and individual survey responses from the Survey of Professional Forecasters and perform a novel three-way decomposition of bond yields into (i) average expectations about short rates (ii) risk premia and (iii) a speculative component due to heterogeneous expectations about the resale value of a bond. We prove that the speculative term must be orthogonal to public information in real time and therefore statistically distinct from risk premia. Empirically, the speculative component is quantitatively important, accounting for up to one percentage point of US yields. Furthermore, estimates of historical risk premia from the heterogeneous information model are less volatile than, and negatively correlated with, risk premia estimated using a standard Affine Gaussian Term Structure model.

Keywords: Heterogenous information, Speculation, Survey data, Term structure of interest rates

JEL Classification: G12, G14

Suggested Citation

Barillas, Francisco and Nimark, Kristoffer, Speculation, Risk Premia and Expectations in the Yield Curve (November 2013). CEPR Discussion Paper No. DP9755, Available at SSRN: https://ssrn.com/abstract=2359533

Francisco Barillas (Contact Author)

University of New South Wales ( email )

College Rd, Kensington
Sydney, 2052
Australia

Kristoffer Nimark

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

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