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.
Most Read
Vox eBooks
Vox Talks
Events
-
3 - 4 May 2019 / London / Queen Mary, University of London
-
15 - 17 May 2019 / Florence, Italy / Florence School of Banking and Finance, European University Institute
-
16 - 17 May 2019 / University of Minho, Guimarães, Portugal / School of Engineering, University of Minho
-
20 - 20 May 2019 / Frankfurt am Main / SUERF - The European Money and Finance Forum Deutsche Bundesbank
-
20 - 22 May 2019 / Florence, Italy / Florence School of Banking and Finance, European University Institute
