Heterogeneous Beliefs, Bonds, and Interest Rates

Research output: Conference PapersRGC 32 - Refereed conference paper (without host publication)peer-review

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Detail(s)

Original languageEnglish
Publication statusPublished - 5 Jul 2024

Conference

Title2024 FMA Asia/Pacific Conference
LocationYonsei University
PlaceKorea, Republic of
CitySeoul
Period4 - 6 July 2024

Abstract

We develop a general equilibrium model of interest rates in a continuous-time production economy populated by shareholders with heterogeneous beliefs. It allows us to study the impact of belief heterogeneity on the risk-free rate and bond characteristics. The model leads to a CIR-model-like dynamic of the risk-free rate with time-dependent parameters that depend endogenously on belief heterogeneity. Flight-to-safety induces an increase in the bond price when the share of optimists declines. In addition, the impact of belief dispersion increases with the bond maturity and higher dispersion results in higher bond prices in economies where pessimistic shareholders hold most of the wealth. In optimistic economies, the relation reverses except for the case of highly dispersed beliefs and (very) long-term bonds. Lastly, heterogeneous beliefs increase bond yield volatility, helping to solve the excess bond yield volatility puzzle.

Research Area(s)

  • Asset pricing, fixed income, heterogeneous beliefs, production economy

Citation Format(s)

Heterogeneous Beliefs, Bonds, and Interest Rates. / Beddock, Arthur; Jouini, Elyès.
2024. Paper presented at 2024 FMA Asia/Pacific Conference, Seoul, Korea, Republic of.

Research output: Conference PapersRGC 32 - Refereed conference paper (without host publication)peer-review