Bond Illiquidity and Excess Volatility

Learning and Excess Volatility

We introduce adaptive learning behavior into a general equilibrium lifecycle economy with capital accumulation. Agents form forecasts of the rate of return to capital assets using least squares autoregressions on past data. We show that, in contrast to the perfect foresight dynamics, the dynamical system under learning possesses equilibria characterized by persistent excess volatility in return...

Bond Supply and Excess Bond Returns

We examine empirically how the supply and maturity structure of government debt affect bond yields and expected returns. We organize our investigation around a term-structure model in which risk-averse arbitrageurs absorb shocks to the demand and supply for bonds of different maturities. These shocks affect the term structure because they alter the price of duration risk. Consistent with the mo...

Welfare and excess volatility of exchange rates

Rational Speculators, Contrarians, and Excess Volatility

The VAR approach for testing present value models is applied to a heterogeneousagent asset pricing model, using historical observations of the S&P500 index. Besides rational long-term investors, that value assets according to expected dividends, the model features rational and contrarian speculators. Agents choose their strategy based on evolutionary considerations. Supplementing the standard p...

Excess Volatility? The Australian Stock Market

Are share markets too volatile? While it is difficult to ignore share market volatility it is important to determine whether volatility is excessive. This paper replicates the Shiller (1981) test as well as applying standard time series analysis to annual Australian stock market data for the period 1883 to 1999. While Shiller’s test suggests the possibility of excess volatility, time series ana...