Speculation, Hedging, and Interest Rates

Andrea Buraschi, Paul Whelan

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We study the properties of bonds in an economy with risk tolerant agents who arerationally induced to trade because they believe in different models for the dynamicsof the economy. We show analytically that low risk aversion coupled with differencesin beliefs can help rationalise several features of Treasury bond markets that the singleagent paradigm finds difficult to reconcile. Empirically, we test predictions from themodel using a large dataset on beliefs about fundamentals and find that: (i) shocksto disagreement lower short term interest rates; (ii) raise the slope of the yield curve;and (iii) predict expected excess bond returns.
Original languageEnglish
Publication date2016
Number of pages58
Publication statusPublished - 2016
EventThe 43rd European Finance Association Annual Meeting (EFA 2016) - BI Norwegian Business School, Oslo, Norway
Duration: 17 Aug 201620 Aug 2016
Conference number: 43
http://www.efa2016.org/

Conference

ConferenceThe 43rd European Finance Association Annual Meeting (EFA 2016)
Number43
LocationBI Norwegian Business School
CountryNorway
CityOslo
Period17/08/201620/08/2016
Internet address

Keywords

  • Fixed income
  • Bond Risk Premia
  • Heterogeneous Agents
  • Speculation

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