Macroeconomic Uncertainty, Difference in Beliefs, and Bond Risk Premia

Posted: 5 Apr 2011

See all articles by Andrea Buraschi

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Paul Whelan

Copenhagen Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2010


In this paper we study empirically the implications of macroeconomic disagreement for the time variation in bond market risk premia. If there is a source of heterogeneity in the belief structure of the economy then differences in beliefs can affect equilibrium asset prices, and the dynamics of disagreement may generate a source of predictable variation in excess bond returns. Using survey data on macroeconomic forecasts of fundamentals spanning interest rates, real aggregates and inflation variables at different horizons we propose a new empirically observable proxy to aggregate macroeconomic disagreement and find a number of novel results. Firstly, consistent with a general equilibrium model, heterogeneity affects the price of risk so that a single factor proxy for disagreement forecasts bond returns with ℛ2 between 15%- 20%. Secondly, by allowing for a time-varying price of risk proportional to disagreement, we substantially improve the forecasting power of a standard affine model for expected returns. This result is carried over to Fama-Bliss regressions where we find that the information contained in the slope of the forward curve regarding expected returns versus expected changes in short rates is state-dependant. Thirdly, while the predictive content of the return forecasting factor (Cochrane and Piazzesi (2005)) is cut dramatically in the 2008 financial crisis, disagreement is largely unaffected. We interpret this result in terms of Fed interventions which may have distorted the shape of the forward curve, removing price based information on expected returns. Finally, we show that the information contained in agents’ belief structure of the economy is different from that contained in macroeconomic aggregates, suggesting that a key determinant for bond returns is the joint subjective uncertainty surrounding the real economy, inflation, and monetary policy.

Keywords: Fixed income, difference in beliefs, heterogeneous economies, term structure

JEL Classification: D9, E3, E4, G12

Suggested Citation

Buraschi, Andrea and Whelan, Paul, Macroeconomic Uncertainty, Difference in Beliefs, and Bond Risk Premia (December 20, 2010). CAREFIN Research Paper No. 27/2010, Available at SSRN:

Andrea Buraschi (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom


Centre for Economic Policy Research (CEPR)

United Kingdom

Paul Whelan

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854

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