Federal Reserve Bank of Chicago
Working Paper Series
Inflation Uncertainty and Disagreement in Bond Risk Premia
This paper examines the relation between variations in perceived inflation uncertainty and bond premia. Using the subjective probability distributions available in the Survey of Professional Forecasters we construct a quarterly time series of average individual uncertainty about inflation forecasts since 1968. We show that this ex-ante measure of inflation uncertainty differs importantly from measures of disagreement regarding inflation forecasts and other proxies, such as model-based ex-post measures of macroeconomic risk. Inflation uncertainty is an important driver of bond premia, but the relation varies across inflation regimes. It is most important in the high-inflation regime early in the sample and the low-inflation regime over the last 15 years. Once the role of inflation uncertainty is accounted for, disagreement regarding inflation forecasts appears a much less important driver of bond premia.
Cite this item
Stefania D'Amico & Athanasios Orphanides, Inflation Uncertainty and Disagreement in Bond Risk Premia, Federal Reserve Bank of Chicago, Working Paper Series WP-2014-24, 11 Jan 2014.
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
Keywords: Survey expectations; probabilistic forecasts; heterogeneity; inflation uncertainty; bond risk premia
This item with handle RePEc:fip:fedhwp:wp-2014-24
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