Speculation and the Term Structure of Interest Rates
33 Pages Posted: 11 Feb 2016 Last revised: 4 May 2016
Date Written: May 3, 2016
We develop and estimate a tractable equilibrium term structure model populated with rational but heterogeneously informed traders that take on speculative positions to exploit what they perceive to be inaccurate market expectations about future bond prices. The speculative motive is an important driver of trading volume. Yield dynamics due to speculation are (i) statistically distinct from classical term structure components due to risk premia and expectations about future short rates and are orthogonal to public information available to traders in real time and (ii) quantitatively important, accounting for a substantial fraction of the variation of long maturity US bond yields.
Keywords: Asset Pricing Theory, Private Information, Term Sturcture of Interest Rates
JEL Classification: G12, E43
Suggested Citation: Suggested Citation