Macroeconomic Uncertainty, Difference in Beliefs, and Bond Risk Premia
Andrea Buraschi, Imperial College London
Paul Whelan, Imperial College London

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.

Difference in beliefs affect asset pricing because they affect how investors value assets and thus their trading decisions. The authors construct empirical measures of belief dispersion from survey data and show that these measures help explain bond returns. These results are of obvious importance to fixed income managers, and they provide insights that may benefit equity managers.