UCLouvain Finance Seminar: Andrea Buraschi

Expected Term Structures

Andrea Buraschi, Imperial College London

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 and propose an alternative real-time measure of bond risk premia motivated from Friedman's market selection hypothesis. Finally, we use this measure to evaluate several reduced-form and structural models and find support for heterogeneous belief economies which generate time-variation in risk premia via both a quantity and price of risk channel. (with Ilaria Piatti & Paul Whelan)