Heterogeneous Beliefs and the Term Structure of Interest Rates

Download or read book Heterogeneous Beliefs and the Term Structure of Interest Rates written by Lue Wu and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider an exchange economy with two groups of investors with identical CRRA utility function but heterogeneous beliefs. The stochastic central tendency of the dividend drift is not observable. Rational investors learn about it from the dividend drift and a signal, while irrational investors base their inference only on the dividend drift observations. The model shows that heterogeneous beliefs increase the bond yields and have strong impact on yield volatilities and correlations. The effect of the level of difference in beliefs is stronger for short term yields, while the effect of consumption share fluctuations between investor groups is stronger for medium and long term yields.