Speculation, Sentiment, and Interest Rates

Andrea Buraschi () and Paul Whelan ()
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Andrea Buraschi: Imperial College, London SW7 2AZ, United Kingdom
Paul Whelan: Copenhagen Business School, 2000 Frederiksberg, Denmark

Management Science, 2022, vol. 68, issue 3, 2308-2329

Abstract: We compare the implications of speculation versus hedging channels for bond markets in heterogeneous agents’ economies. Treasuries command a significant risk premium when optimistic agents speculate by leveraging their positions using bonds. Disagreement drives a wedge between marginal agent versus econometrician beliefs (sentiment). When speculative demands dominate, the interaction between belief heterogeneity and sentiment helps rationalize several puzzling characteristics of Treasury markets. Empirically, we test model predictions and find that larger disagreement (i) lowers the risk-free rate, (ii) raises the slope of the yield curve, and (iii) with positive sentiment increases bond risk premia and makes its dynamics countercyclical.

Keywords: fixed income; bond risk premia; heterogeneous agents; speculation (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:3:p:2308-2329

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