Heterogeneous Expectations and Bond Markets

By Hongjun Yan. 2010

268 citations recorded by the source corpus.

This paper presents a dynamic equilibrium model of bond markets in which two groups of agents hold heterogeneous expectations about future economic conditions. The heterogeneous expectations cause agents to take speculative positions against each other and therefore generate endogenous relative wealth fluctuation. The relative wealth fluctuation amplifies asset price volatility and contributes to the time variation in bond premia. Our model shows that a modest amount of heterogeneous expectation can help explain several puzzling phenomena, including the "excessive volatility" of bond yields, the failure of the expectations hypothesis, and the ability of a tent-shaped linear combination of forward rates to predict bond returns.

View Paper: https://www.semanticscholar.org/paper/7a708e05c3078152448deaa9331a4dcd12a9354c

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Citations in the corpus

Investor Flows and the 2008 Boom/Bust in Oil Prices (2014, background): “Within present value models that share many of the same intertemporal considerations involved in pricing commodities,10 Xiong and Yan (2009) and Nimark (2009) show that groups of traders that hold different views will naturally engage in speculative activity with each other.”
A Preferred‐Habitat Model of the Term Structure of Interest Rates (2021, unknown): “…models that generate a positive premia–slope relationship include Wachter (2006), Buraschi and Jiltsov (2007), and Lettau and Wachter (2011), who assume habit formation, Xiong and Yan (2010), who assume heterogeneous beliefs, and Gabaix (2012), who assumes rare disasters with time-varying severity.”
Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance (2012, unknown): “, Vayanos and Vila (2006), Xiong and Yan (2006).”
A Welfare Criterion For Models With Distorted Beliefs (2014, unknown): “…number of asset pricing models with heterogeneous beliefs (e.g., Detemple and Murthy (1994), Kurz (1996), Zapatero (1998), Basak (2000), Buraschi and Jiltsov (2006), Jouini and Napp (2007), David (2008), Dumas, Kurshev and Uppal (2009), Xiong and Yan (2010), and Dumas, Lewis, and Osambela (2011)).”
Rare Disasters and Risk Sharing with Heterogeneous Beliefs (2011, background): “As shown by Yan (2008), an agent who has wrong beliefs about the growth rate of aggregate consumption can survive for long periods of time.”
A Preferred-Habitat Model of the Term Structure of Interest Rates (2009, unknown): “short rate. Xiong and Yan (2006) consider a CIR-type model with two agents holding heteroge-”