Macroeconomic Uncertainty, Difference in Beliefs, and Bond Risk Premia

Andrea Buraschi, Paul Whelan
2010 Social Science Research Network  
In this paper we study empirically the implications of macroeconomic disagreement for bond market dynamics. If there is a source of heterogeneity in the belief structure of the economy then differences in beliefs can affect equilibrium asset prices. Using survey data on a unique data set we propose a new empirically observable proxy to measure macroeconomic disagreement and find a number of novel results. First, consistent with a general equilibrium model, heterogeneity in beliefs affect the
more » ... ce of risk so that belief dispersion regarding the real economy, inflation, short and long term interest rates predict excess bond returns with R 2 between 21%-43%. Second, macroeconomic disagreement explains the volatility of stock and bonds with high statistical significance with an R 2 ∼ 26% in monthly projections. Third, disagreement also contains significant information trading activity: dispersion in beliefs explains the growth rate of open interest on 10 year treasury notes with R 2 equal to 21%. Fourth, while around half the information contained in the cross-section of expectations is spanned by the yield curve, there remains large unspanned component important for bond pricing. Finally, we control for an array of alternative predictor variables and show that the information contained in the belief structure of the economy is different from either consensus views or fundamentals. JEL classification: D9, E3, E4, G12
doi:10.2139/ssrn.1659388 fatcat:3k6anqlnybfebj6ii2xwvjdamu