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The quality of public information and the term structure of interest rates

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Author

  • Frederik Lundtofte

Summary, in English

This paper analyzes the term structure of interest rates in an exchange-only Lucas (Econometrica 46:1429–1445, 1978) economy where consumers learn about a stochastic growth rate through observations of the endowment process and an external public signal. We allow for deluded consumers, who exaggerate the degree of covariation between the external public signal and the growth rate. With such consumers, there can be a premium for noisy external public information in long-term bonds and the social value of more precise public information can be negative. Moreover, our model can create excessive yield volatility and deviations from the expectations hypothesis.

Publishing year

2013

Language

English

Pages

715-740

Publication/Series

Review of Quantitative Finance and Accounting

Volume

40

Issue

4

Document type

Journal article

Publisher

Springer

Topic

  • Economics

Keywords

  • learning
  • information quality
  • incomplete information
  • term structure of interest rates

Status

Published

ISBN/ISSN/Other

  • ISSN: 0924-865X