Ambiguity, nominal bond yields and real bond yields / by Guihai Zhao.: FB3-5/2018-24E-PDF
"Equilibrium bond-pricing models rely on inflation being bad news for future growth to generate upward-sloping nominal yield curves. We develop a model that can generate upward-sloping nominal and real yield curves by instead using ambiguity about inflation and growth. Ambiguity can help resolve the puzzling fact that upward-sloping yield curves have persisted despite positive inflation shocks changing from negative to positive news about growth in the last twenty years. Investors make decisions using worst-case beliefs, under which the expectations hypothesis roughly holds. However, inflation and growth evolve over time under the true distribution, and this difference makes excess returns on long-term bonds predictable. The model is also consistent with the recent empirical findings on the term structure of equity returns"--Abstract, p. ii.
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| Department/Agency | Bank of Canada. |
|---|---|
| Title | Ambiguity, nominal bond yields and real bond yields / by Guihai Zhao. |
| Series title | Bank of Canada staff working paper, 1701-9397 ; 2018-24 |
| Publication type | Series - View Master Record |
| Language | [English] |
| Format | Electronic |
| Electronic document | |
| Note(s) | "June 2018." Includes bibliographical references (p. 37-41). Includes abstract in French. |
| Publishing information | [Ottawa] : Bank of Canada, 2018. |
| Author / Contributor | Zhao, Guihai. |
| Description | 46 p. : col. charts. |
| Catalogue number |
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| Subject terms | Bonds--Prices--Econometric models Inflation Interest rates |
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