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**1 - 2**of**2**### Yield Curve

, 2012

"... An affine asset pricing model in which traders have rational but heterogeneous expectations about future asset prices is developed. We use the framework to analyze the term structure of interest rates and to perform a novel three-way decomposition of bond yields into (i) average expectations about s ..."

Abstract
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An affine asset pricing model in which traders have rational but heterogeneous expectations about future asset prices is developed. We use the framework to analyze the term structure of interest rates and to perform a novel three-way decomposition of bond yields into (i) average expectations about short rates (ii) common risk premia and (iii) a speculative component due to heterogeneous expectations about the resale value of a bond. The speculative term is orthogonal to public information in real time and therefore statistically distinct from common risk premia. Empirically we find that the speculative component is quantitatively important accounting for up to a percentage point of yields, even in the low yield environment of the last decade. Furthermore, allowing for a speculative component in bond yields results in estimates of historical risk premia that are more volatile than suggested by standard Affine Gaussian term structure models which our framework nests.

### Speculation, Risk Premia and Expectations in the Yield Curve

"... An affine asset pricing model in which traders have rational but heterogeneous expectations about future asset prices is developed. We use the framework to analyze the term structure of interest rates and to perform a novel three-way decomposition of bond yields into (i) average expectations about s ..."

Abstract
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An affine asset pricing model in which traders have rational but heterogeneous expectations about future asset prices is developed. We use the framework to analyze the term structure of interest rates and to perform a novel three-way decomposition of bond yields into (i) average expectations about short rates (ii) common risk premia and (iii) a speculative component due to heterogeneous expectations about the resale value of a bond. The speculative term is orthogonal to public infor-mation in real time and therefore statistically distinct from common risk premia. Empirically we find that the speculative component is quantitatively important accounting for up to a percentage point of yields, even in the low yield environment of the last decade. Furthermore, allowing for a speculative component in bond yields results in estimates of historical risk premia that are more volatile than suggested by standard Affine Gaussian term structure models which our framework nests.