Martin Ellison, Andreas Tischbirek, 10 May 2018

The bond premium puzzle arises because the excess yield that investors require to hold a long-term bond is too small in quantitative macroeconomic models. Drawing on the beauty contest literature, this column argues that realistic term premia can be generated by differentiating between private and public information and by introducing strategic complementarities in the formation of expectations. It shows that a significant proportion of US term premia is driven by a beauty contest in forecasting, which rewards investors for being accurate andclose to the average forecast of others.

Stefano Giglio, Matteo Maggiori, Johannes Stroebel, Andreas Weber, 23 January 2016

While some of the costs of climate change won’t be incurred for centuries, the actions to mitigate them need to be taken today. Over such a long timespan, small changes in discount rates can drastically change the attractiveness of such investments. This column presents estimates of appropriate discount rates for very long time horizons. The long-run discount rate for one important risky asset class – real estate – is estimated at 2.6%. This provides an upper bound on long-run discount rates for climate change abatement, one that is substantially lower than some of the rates currently being employed.

Philippe Andrade, Richard Crump, Stefano Eusepi, Emanuel Moench, 23 December 2014

Expectations are critical for macroeconomics and financial markets. But the expectation-formation process is not well understood. This column discusses some empirical characteristics of forecast disagreement from professional forecasters in the US, and discusses the ‘information frictions’ that underlie the heterogeneity of expectations.

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