Subjective Bond Returns and Belief Aggregation

86 Pages Posted: 25 Apr 2019 Last revised: 13 Apr 2021

See all articles by Andrea Buraschi

Andrea Buraschi

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

Ilaria Piatti

Queen Mary University of London - School of Economics and Finance

Paul Whelan

Copenhagen Business School

Date Written: April 13, 2021

Abstract

The forecasting literature has presented overwhelming evidence that the aggregation of heterogeneous expectations leads to improvements in forecast accuracy; however, outperforming a simple equal weight- ing scheme has proved challenging. This paper proposes an aggregation scheme of subjective bond return expectations based on the historical accuracy of professional interest rate forecasters. Our aggregate belief proxy outperforms equal weight and median weight combinations and is comparable to statistical projections even if its dynamics are quite different. With this measure at hand, we study the relationship between quantities of risk and compensation for risk and demonstrate a strong link to subjective expectations even if this is difficult to detect using realised returns.

Keywords: Forecasting, Forecast Combinations, Heterogeneous Beliefs, Bond Returns.

JEL Classification: D9, E3, E4, G12

Suggested Citation

Buraschi, Andrea and Piatti, Ilaria and Whelan, Paul, Subjective Bond Returns and Belief Aggregation (April 13, 2021). Saïd Business School WP 2016-36, Available at SSRN: https://ssrn.com/abstract=3377279 or http://dx.doi.org/10.2139/ssrn.3377279

Andrea Buraschi (Contact Author)

Imperial College Business School ( email )

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

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ilaria Piatti

Queen Mary University of London - School of Economics and Finance ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Paul Whelan

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854
Denmark

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