Rationality and Subjective Bond Risk Premia

Buraschi, Andrea, Piatti, Ilaria and Whelan, Paul (2018) Rationality and Subjective Bond Risk Premia. Saïd Business School Working Paper 2016-36.

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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.

Item Type: Oxford Saïd Research Paper
Keywords: Rational Expectations, Cross-Section of Beliefs, Bond Risk Premia
Subject(s): Finance
Date Deposited: 18 Jan 2017 16:53
Last Modified: 01 Jun 2018 12:10
Funders: n/a
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6275

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