Subjective Bond Risk Premia and Belief Aggregation
73 Pages Posted: 25 Apr 2019 Last revised: 7 Oct 2019
Date Written: August 2019
The central ingredient of empirical asset pricing tests is the (expected) risk premium. However, heterogeneity in expectations makes aggregation of beliefs to the marginal agent a non-trivial task. This paper proposes a novel aggregation approach inspired by Friedman’s “selection in competitive markets” hypothesis. Our measure is available for the cross-section of U.S long term bond maturities and is available in real-time for an extended sample period. We use this measure to revisit conclusions of structural models and find support for rational determinants of risk premia and, in particular, a stronger role for the quantity of risk channel than what has been previously documented.
A previous version of this paper can be found at: https://ssrn.com/abstract=2901502.
Keywords: Bond Risk Premia, Rational Expectations, Heterogeneous Beliefs, Aggregation
JEL Classification: D9, E3, E4, G12
Suggested Citation: Suggested Citation