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Learning From Disagreement in the U.S. Treasury Bond Market
Author(s) -
GIACOLETTI MARCO,
LAURSEN KRISTOFFER T.,
SINGLETON KENNETH J.
Publication year - 2021
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12971
Subject(s) - treasury , bond , predictive power , economics , inflation (cosmology) , recession , bond market , risk premium , financial economics , monetary economics , econometrics , keynesian economics , finance , political science , law , philosophy , physics , epistemology , theoretical physics
We study risk premiums in the U.S. Treasury bond market from the perspective of a Bayesian econometrician B L who learns in real time from disagreement among investors about future bond yields. Notably, disagreement has substantial predictive power for yields, and B L 's risk premiums are less volatile than those in the analogous model without learning. B L 's forecasts are substantially more accurate than the consensus forecasts of market professionals, particularly following U.S. recessions. The predictive power of disagreement is distinct from the (much weaker) one of inflation and output growth. Rather, it appears to reflect uncertainty about future fiscal policy.