Learning From Disagreement in the U.S. Treasury Bond Market

48 Pages Posted: 26 Jul 2015 Last revised: 12 May 2020

See all articles by Marco Giacoletti

Marco Giacoletti

Marshall School of Business

Kristoffer Laursen

AQR Capital Management, LLC

Kenneth J. Singleton

Stanford University - Graduate School of Business

Date Written: February 29, 2016

Abstract

We study risk premiums in the US Treasury bond market from the perspective of a Bayesian econometrician RA who learns in real-time from disagreement among investors about future bond yields. Notably, disagreement has substantial predictive power for yields, and RA's risk premiums are less volatile than those in the analogous model without learning. RA's forecasts are substantially more accurate than the consensus forecasts of market professionals, particularly following U.S. recessions. The predictive power of disagreement is distinct from the (much weaker) forecasting power of inflation and output growth. Rather, it appears to reflect uncertainty about future fiscal policy.

Keywords: term structure of bond yields, learning, dispersion of beliefs, risk premiums

JEL Classification: E43, E44, G12, D83

Suggested Citation

Giacoletti, Marco and Laursen, Kristoffer and Singleton, Kenneth J., Learning From Disagreement in the U.S. Treasury Bond Market (February 29, 2016). Stanford University Graduate School of Business Research Paper No. 15-45, Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2635742 or http://dx.doi.org/10.2139/ssrn.2635742

Marco Giacoletti

Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Kristoffer Laursen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Kenneth J. Singleton (Contact Author)

Stanford University - Graduate School of Business ( email )

Knight Management Center
655 Knight Way
Stanford, CA 94305-7298
United States
650-723-5753 (Phone)

HOME PAGE: http://www.stanford.edu/~kenneths

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