This paper implements a structural model of the yield curve with data on nominal positions and survey forecasts. Bond prices are characterized in terms of investors' current portfolio holdings as well as their subjective beliefs about future bond payoffs. Risk premia measured by an econometrician vary because of changes in investors' subjective risk premia that are identified from portfolios and subjective beliefs but also because subjective beliefs differ from those of the econometrician. The main result is that investors' systematic forecast errors are an important source of business cycle variation in measured risk premia. By contrast, subjective risk premia move less and more slowly over time.
JEL classification: E4, E5, G1
Key words: expectations, surveys, interest rates, portfolio choice, asset positions, term structure, yield curve
The authors thank Ken Froot for sharing the Goldsmith-Nagan survey data with them and the National Science Foudation for financial support to purchase the Blue Chip Survey data. They also thank Andy Atkeson, Bing Han, Lars Hansen, Narayana Kocherlakota, Ken Singleton, Dimitri Vayanos, seminar participants at the Federal Reserve Bank of San Francisco and the University of Texas at Austin, and conference participants at the Federal Reserve Bank of Atlanta, the 2007 Nemmers Conference at Northwestern University, the University of California–Los Angeles, and the summer 2007 Vienna conference. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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