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

Tack Yun (), Eunmi Ko and Jinsook Kim
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Eunmi Ko: Seoul National University
Jinsook Kim: Seoul National University

No 527, 2013 Meeting Papers from Society for Economic Dynamics

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.

Date: 2013
New Economics Papers: this item is included in nep-cbe, nep-mac and nep-upt
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Working Paper: The Role of Bounded Rationality in Macro-Finance Affine Term-Structure Models (2012)
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