An affine asset pricing model in which agents have rational but heterogeneous expectations about future
asset prices is developed. We estimate the model using data on bond yields and individual survey responses
from the Survey of Professional Forecasters and perform a novel three-way decomposition of
bond yields into (i) average expectations about short rates (ii) risk premia and (iii) a speculative component
due to heterogeneous expectations about the resale value of a bond. We prove that the speculative
term ...
An affine asset pricing model in which agents have rational but heterogeneous expectations about future
asset prices is developed. We estimate the model using data on bond yields and individual survey responses
from the Survey of Professional Forecasters and perform a novel three-way decomposition of
bond yields into (i) average expectations about short rates (ii) risk premia and (iii) a speculative component
due to heterogeneous expectations about the resale value of a bond. We prove that the speculative
term must be orthogonal to public information in real time and therefore statistically distinct from risk
premia. Empirically, the speculative component is quantitatively important, accounting for up to one
percentage point of US yields. Furthermore, estimates of historical risk premia from the heterogeneous
information model are less volatile than, and negatively correlated with, risk premia estimated using a
standard Affine Gaussian Term Structure model.
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