Disaggregation Reverses the Risk-Free Rate Puzzle

Matthew Wilson ()
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Matthew Wilson: Economics Department, University of Richmond, 102 UR Dr, Richmond, VA 23173

Annals of Economics and Finance, 2025, vol. 26, issue 2, 643-665

Abstract: In the macro data, it appears that people are buying too many bonds. They help agents smooth consumption, but the rate of return is low and aggregate consumption is already very smooth. However, consumption at the household level is far more volatile. This makes bonds more appealing. Instead of solving the puzzle, the main result is reversed: households are not buying enough bonds. Under some specifcations, the unconditional Euler equation is not rejected, but in those cases the forecast errors are inconsistent with rational expectations.

Keywords: Risk-free rate puzzle; Bonds; Interest rates; Consumer Expenditure Survey (search for similar items in EconPapers)
JEL-codes: E4 G1 (search for similar items in EconPapers)
Date: 2025
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