Interest Rate Skewness and Biased Beliefs

„The conditional skewness of Treasury yields is an important indicator of the risks to the macroeconomic outlook. Positive skewness signals upside risk to interest rates during periods of accommodative monetary policy and an upward-sloping yield curve, and vice versa. Skewness has substantial predictive power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and survey forecast errors for interest rates. The estimated expectational errors, or biases in beliefs, are quantitatively important for statistical bond risk premia. These findings are consistent with a heterogeneous-beliefs model where one of the agents is wrong about consumption growth.”

Bauer, Michael and Chernov, Mikhail, Interest Rate Skewness and Biased Beliefs (December 28, 2022). Forthcoming in Journal of Finance

Available at SSRN: https://ssrn.com/abstract=4318072 or http://dx.doi.org/10.2139/ssrn.4318072//