Speculation, Hedging, and Interest Rates

Andrea Buraschi; Paul Whelan

Speculation, Hedging, and Interest Rates

Andrea Buraschi, Paul Whelan

Department of Finance

Imperial College London

Research output: Contribution to conference › Paper › Research › peer-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 language	English
Publication date	2016
Number of pages	58
Publication status	Published - 2016
Event	The 43rd European Finance Association Annual Meeting (EFA 2016) - BI Norwegian Business School, Oslo, Norway Duration: 17 Aug 2016 → 20 Aug 2016 Conference number: 43 http://www.efa2016.org/

Conference

Conference	The 43rd European Finance Association Annual Meeting (EFA 2016)
Number	43
Location	BI Norwegian Business School
Country/Territory	Norway
City	Oslo
Period	17/08/2016 → 20/08/2016
Internet address	http://www.efa2016.org/

Keywords

Fixed income
Bond Risk Premia
Heterogeneous Agents
Speculation

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https://www.conftool.com/efa2016/index.php/EFA2016-1634-APE-02-Whelan-Speculation%2C_Hedging%2C_and_Interest_Rates.pdf?page=downloadPaper&filename=EFA2016-1634-APE-02-Whelan-Speculation%2C_Hedging%2C_and_Interest_Rates.pdf&form_id=1634&form_version=finalLicence: Unspecified

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Buraschi, A., & Whelan, P. (2016). Speculation, Hedging, and Interest Rates. Paper presented at The 43rd European Finance Association Annual Meeting (EFA 2016), Oslo, Norway. https://www.conftool.com/efa2016/index.php/EFA2016-1634-APE-02-Whelan-Speculation%2C_Hedging%2C_and_Interest_Rates.pdf?page=downloadPaper&filename=EFA2016-1634-APE-02-Whelan-Speculation%2C_Hedging%2C_and_Interest_Rates.pdf&form_id=1634&form_version=final

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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.",

keywords = "Fixed income, Bond risk premia, Heterogeneous agents, Speculation, Fixed income, Bond Risk Premia, Heterogeneous Agents, Speculation",

author = "Andrea Buraschi and Paul Whelan",

year = "2016",

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Buraschi, A & Whelan, P 2016, 'Speculation, Hedging, and Interest Rates', Paper presented at The 43rd European Finance Association Annual Meeting (EFA 2016), Oslo, Norway, 17/08/2016 - 20/08/2016. <https://www.conftool.com/efa2016/index.php/EFA2016-1634-APE-02-Whelan-Speculation%2C_Hedging%2C_and_Interest_Rates.pdf?page=downloadPaper&filename=EFA2016-1634-APE-02-Whelan-Speculation%2C_Hedging%2C_and_Interest_Rates.pdf&form_id=1634&form_version=final>

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AU - Buraschi, Andrea

AU - Whelan, Paul

N1 - Conference code: 43

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N2 - 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.

AB - 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.

KW - Fixed income

KW - Bond risk premia

KW - Heterogeneous agents

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KW - Bond Risk Premia

KW - Heterogeneous Agents

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