Ambiguity, Nominal Bond Yields, and Real Bond Yields
American Economic Review: Insights, 2020, vol. 2, issue 2, 177-92
This paper presents an equilibrium bond-pricing model that jointly explains the upward-sloping nominal and real yield curves and the violation of the expectations hypothesis. Instead of relying on the inflation risk premium, the ambiguity-averse agent faces different amounts of Knightian uncertainty in the long run versus the short run; hence, the model-implied nominal and real short rate expectations are upward sloping under the agent's worst-case equilibrium beliefs. The expectations hypothesis roughly holds under investors' worst-case beliefs. The difference between the worst-case scenario and the true distribution makes realized excess returns on long-term bonds predictable.
JEL-codes: D81 D84 E23 E31 E43 E44 G12 (search for similar items in EconPapers)
Note: DOI: 10.1257/aeri.20190155
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Working Paper: Ambiguity, Nominal Bond Yields and Real Bond Yields (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:aea:aerins:v:2:y:2020:i:2:p:177-92
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