Heterogeneous Expectations and Bond Markets

Wei Xiong, Hongjun Yan and Review Financial

Yale School of Management Working Papers from Yale School of Management

Abstract: This paper presents a dynamic equilibrium model of bond markets in which two groups of agents hold heterogeneous expectations about future economic conditions. The heterogeneous expectations cause agents to take speculative positions against each other and therefore generate endogenous relative wealth fluctuation. The relative wealth fluctuation amplifies asset price volatility and contributes to the time variation in bond premia. Our model shows that a modest amount of heterogeneous expectation can help explain several puzzling phenomena, including the "excessive volatility" of bond yields, the failure of the expectations hypothesis, and the ability of a tent-shaped linear combination of forward rates to predict bond returns.

Keywords: bond markets; heterogeneous expectations; yield curve; bond yield volatility Accepted Paper Series (search for similar items in EconPapers)
Date: 2007-01-01, Revised 2009-06-01
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Heterogeneous Expectations and Bond Markets (2010)
Working Paper: Heterogeneous Expectations and Bond Markets (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:wpaper:amz2614

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