Subjective Bond Risk Premia and Belief Aggregation

73 Pages Posted: 25 Apr 2019 Last revised: 7 Oct 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: August 2019

Abstract

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

Buraschi, Andrea and Piatti, Ilaria and Whelan, Paul, Subjective Bond Risk Premia and Belief Aggregation (August 2019). Saïd Business School WP 2019-06 [Updated version of SBS WP 2016-36]. Available at SSRN: https://ssrn.com/abstract=3377279 or http://dx.doi.org/10.2139/ssrn.3377279

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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