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Presidential Address: How Much “Rationality” Is There in Bond‐Market Risk Premiums?
Author(s) -
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.13062
Subject(s) - bond , rationality , presidential address , business cycle , bayesian probability , econometrics , economics , yield (engineering) , dispersion (optics) , bayesian inference , presidential system , rational expectations , bond market , actuarial science , monetary economics , computer science , keynesian economics , finance , artificial intelligence , political science , materials science , physics , optics , public administration , politics , law , metallurgy
Beliefs of professional forecasters are benchmarked against those of a Bayesian econometrician BE who is learning about the unknown dynamics of the bond risk factors. Consistent with rational Bayesian learning, the forecast errors of individual professionals and BE are comparably predictable over the business cycle. The secular and cyclical patterns of professionals' forecasts relative to those of BE are explored in depth. Inconsistent with many models with belief dispersion, the relationship between professionals' yield disagreement and their matched disagreements about macroeconomic fundamentals is very weak.