Speculation and the Bond Market: An Empirical No-arbitrage Framework

Kristoffer Nimark () and Francisco Barillas

No 10892, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: An affine no-arbitrage asset pricing framework is developed that allows for agents to have rational but heterogeneous expectations. The framework can match both bond yields and the observed dispersion of yield expectations in survey data. Heterogenous information introduces a speculative component in bond prices that (i) is statistically distinct from classical components such as risk-premia and expectations about future short rates and (ii) quantitatively important, at times accounting for up to 125 basis points of US yields. Allowing for heterogenous expectations also changes the estimated relative importance of risk-premia and expectations about future short rates in historical bond yields compared to a standard affine model. The framework imposes weaker restrictions than existing heterogenous information asset pricing models and is thus well-suited to empirically quantify the importance of relaxing the common information assumption.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2015-10
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Citations: View citations in EconPapers (1)

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