Expected Term Structures

Andrea Buraschi, Ilaria Piatti, Paul Whelan

Research output: Contribution to conferencePaperResearchpeer-review


This paper studies the properties of bond risk premia in the cross-section of subjective expectations. We exploit an extensive dataset of yield curve forecasts from financial institutions and document a number of novel findings. First, contrary to evidence presented for stock markets but consistent with rational expectations, the relation between subjective expectations and future realizations is positive, and this result holds for the entire cross-section of beliefs. Second, when predicting short term interest rates, primary dealers display superior forecasting ability when compared to non-primary dealers. Third, we reject the null hypothesis that subjective expected bond returns are constant. When predicting long term rates, however, primary dealers have no information advantage. This suggests that a key source of variation in long-term bonds are risk premia and not short- term rate variation. Fourth, we show that consensus beliefs are not a sufficient statistics to describe the cross-section of beliefs. Moreover, the beliefs of the most accurate agents are those most spanned by a contemporaneous cross-section of bond prices. This supports equilibrium models and Friedman’s market selection hypothesis. Finally, we use ex-ante spanned subjective beliefs to evaluate several reduced-form and structural models. We find support for heterogeneous beliefs models and also uncover a number of statistically significant relationships in favour of alternative rational expectations models once the effect of heterogeneous beliefs is taken into account.
Original languageEnglish
Publication date2017
Number of pages60
Publication statusPublished - 2017
EventThe 44th European Finance Association Annual Meeting (EFA 2017) - University of Mannheim, Mannheim, Germany
Duration: 23 Aug 201726 Aug 2017
Conference number: 44


ConferenceThe 44th European Finance Association Annual Meeting (EFA 2017)
LocationUniversity of Mannheim
Internet address


  • Rational expectations
  • Cross-section of beliefs
  • Bond risk premia
  • Spanning
  • Expectation formation

Cite this