Speculation and the Term Structure of Interest Rates

33 Pages Posted: 11 Feb 2016 Last revised: 4 May 2016

Francisco Barillas

Emory University - Goizueta Business School

Kristoffer P. Nimark

Cornell University - Department of Economics

Date Written: May 3, 2016

Abstract

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

Barillas, Francisco and Nimark, Kristoffer P., Speculation and the Term Structure of Interest Rates (May 3, 2016). Available at SSRN: https://ssrn.com/abstract=2729987 or http://dx.doi.org/10.2139/ssrn.2729987

Francisco Barillas (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Kristoffer P. Nimark

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

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