The Role of Bounded Rationality in Macro-Finance Affine Term-Structure Models

Tack Yun (), Jinsook Kim and Eunmi Ko

MPRA Paper from University Library of Munich, Germany

Abstract: Our goal in this paper is two-fold. First, we develop a class of term structure models that allow for the role of bounded rationality by incorporating either information-processing constraint or fear for mis-specification into affine term structure models. We indentify a set of sufficient conditions to generate the observational equivalence between affine term-structure models with rational inattention and a fear for model misspecification. The presence of bounded rationality creates a new additional factor that is not spanned by conventional factors such as level, slope, and curvature factors. Second, our empirical results indicate that substantial amounts of information capacity constraint and robustness preference for model misspecification are needed to explain the observed behavior of yields.

Keywords: Rational Inattention; Robustness; Affine Term Structure Models; No-Arbitrage (search for similar items in EconPapers)
JEL-codes: E43 E44 G11 G12 (search for similar items in EconPapers)
Date: 2012-10-01
New Economics Papers: this item is included in nep-mac, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Role of Bounded Rationality in Macro-Finance Affine Term-Structure Models (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:44212

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