Speculation and the Bond Market: An Empirical No-Arbitrage Framework

61 Pages Posted: 20 Oct 2015

See all articles by Francisco Barillas

Francisco Barillas

University of New South Wales

Kristoffer Nimark

Cornell University - Department of Economics

Date Written: October 2015

Abstract

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. Heterogenous 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 heterogenous 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 heterogenous information asset pricing models and is thus well-suited to empirically quantify the importance of relaxing the common information assumption.

JEL Classification: G12, G14

Suggested Citation

Barillas, Francisco and Nimark, Kristoffer, Speculation and the Bond Market: An Empirical No-Arbitrage Framework (October 2015). CEPR Discussion Paper No. DP10892, Available at SSRN: https://ssrn.com/abstract=2676598

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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