Rationality and Subjective Bond Risk Premia

Posted: 19 Jan 2017 Last revised: 25 Apr 2019

See all articles by Andrea Buraschi

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Ilaria Piatti

University of Oxford - Said Business School

Paul Whelan

Copenhagen Business School

Date Written: May 1, 2018

Abstract

This paper documents large micro-heterogeneity and forecasting skill in the cross-section of survey based bond risk premia. We reject informationally constrained rational expectations but show a learning model distorted by sentiment is consistent with the data. Aggregating, we propose a belief measure for the marginal agent that is consistent with Friedman's market selection hypothesis. This measure is available in real-time and compares favourably to popular statistical models. Moreover, forecast errors from this measure, while predictable, are not easily corrected in real-time. Finally, we re-assess structural models and and support for both sentiment and time-varying quantity of risk channels.

A new version of this paper can be found at: https://ssrn.com/abstract=3377279.

Keywords: Rational Expectations, Cross-Section of Beliefs, Bond Risk Premia,

Suggested Citation

Buraschi, Andrea and Piatti, Ilaria and Whelan, Paul, Rationality and Subjective Bond Risk Premia (May 1, 2018). Saïd Business School WP 2016-36 [Previous version of SBS WP 2019-06]. Available at SSRN: https://ssrn.com/abstract=2901502 or http://dx.doi.org/10.2139/ssrn.2901502

Andrea Buraschi (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ilaria Piatti

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Paul Whelan

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854
Denmark

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