Presidential Address: How Much “Rationality” Is There in Bond-Market Risk Premiums?

Beliefs of professional forecasters are benchmarked against those of a Bayesian econometrician ℬℰ who is learning about the unknown dynamics of the bond risk factors. Consistent with rational Bayesian learning, the forecast errors of individual professionals and ℬℰ are comparably predictable over the business cycle. The secular and cyclical patterns of professionals’ forecasts relative to those of ℬℰ are explored in depth. Inconsistent with many models with belief dispersion, the relationship between professionals’ yield disagreement and their matched disagreements about macroeconomic fundamentals is very weak.