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Subjective Bond Returns and Belief Aggregation

Author

Listed:
  • Andrea Buraschi
  • Ilaria Piatti
  • Paul Whelan

Abstract

This paper proposes an aggregation scheme of subjective bond return expectations based on the historical accuracy of professional interest rate forecasters. We use disaggregated survey data on bond returns and document large disagreement in the cross-sectional distribution and persistence in forecast accuracy. Our aggregate subjective belief proxy outperforms equal weighting schemes, and its dynamics are significantly different from statistical forecasting models. With this measure in hand, we study the relationship between quantities of risk and subjective expectations of excess returns and demonstrate a strong link between the two, even if such a relationship is difficult to detect using realized returns.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Andrea Buraschi & Ilaria Piatti & Paul Whelan, 2022. "Subjective Bond Returns and Belief Aggregation," The Review of Financial Studies, Society for Financial Studies, vol. 35(8), pages 3710-3741.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:8:p:3710-3741.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab115
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    Citations

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    Cited by:

    1. Michael Bauer & Mikhail Chernov, 2024. "Interest Rate Skewness and Biased Beliefs," Journal of Finance, American Finance Association, vol. 79(1), pages 173-217, February.
    2. Albert S. Kyle & Anna A. Obizhaeva & Yajun Wang, 2023. "Beliefs Aggregation and Return Predictability," Journal of Finance, American Finance Association, vol. 78(1), pages 427-486, February.
    3. Croitoru, Benjamin & Jiao, Feng & Lu, Lei, 2024. "Nominal exchange rates and heterogeneous beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 166(C).
    4. Nagel, Stefan & Xu, Zhengyang, 2023. "Dynamics of subjective risk premia," Journal of Financial Economics, Elsevier, vol. 150(2).

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G4 - Financial Economics - - Behavioral Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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