Disappointment Aversion, Term Structure, and Predictability Puzzles in Bond Markets

62 Pages Posted: 4 Jun 2016 Last revised: 7 Jul 2020

Multiple version iconThere are 2 versions of this paper

Date Written: July 2, 2020

Abstract

We solve a dynamic equilibrium model with generalized disappointment aversion preferences and continuous state endowment dynamics. We apply the framework to the term structure of interest rates and show that the model generates an upward sloping term structure of nominal interest rates, a downward sloping term structure of real interest rates, and that it accounts for the failure of the expectations hypothesis. The key ingredients are preferences with disappointment aversion, preference for early resolution of uncertainty, and an endowment economy with three state variables: time-varying macroeconomic uncertainty, time-varying expected inflation and inflation uncertainty.

Keywords: Asset Pricing, Macrofinance, Numerical Methods, Term Structure of Interest Rates

JEL Classification: C6, E43, E44, G12, G13

Suggested Citation

Augustin, Patrick and Tédongap, Roméo, Disappointment Aversion, Term Structure, and Predictability Puzzles in Bond Markets (July 2, 2020). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2789273 or http://dx.doi.org/10.2139/ssrn.2789273

Patrick Augustin (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://https://patrickaugustin.ca/

Roméo Tédongap

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France
+33134439734 (Phone)
+33134439734 (Fax)

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