Subjective Risk Premia in Bond and FX Markets – Research Seminar by Paul WhelanRegular Research Seminars of Corvinus University of Budapest, Institute of Finance.
Date and Time: 12 June 2023, Monday, 11:40-12:40 (Budapest time)
Venue: Corvinus, Building C, Room C.107
Abstract: This paper elicits subjective risk premia from an international survey dataset on interest rates and exchange rates. Survey implied risk premia are (i) unconditionally negative for bonds, positive for investment currencies and negative for funding currencies, (ii) correlated with (subjective) macro expectations, (iii) correlated with quantities of risk, (iv) mean-reverting, as opposed to extrapolative; and (v) predict future realised returns with a positive sign. Taking beliefs as given, we estimate a subjective asset pricing model with time-variation in economic uncertainty which supports these findings. This demonstrates that subjective risk premia respect a risk-return trade-off regardless of whether they are rational or not, suggesting that behavioural theories of belief formation can co-exist with rational theories of risk pricing.
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