Topic: Reaching for Maturity

Speaker: Jialin Yu, Associate Professor of Finance, Hong Kong University of Science and Technology

Date: November 20, 2013 (Wed.)

Time: 1:00-2:30pm

Location: Building 4, Room 101

Language: English/Chinese

Abstract:

Traditional theories of interest rates predict that the Treasury yield curve should, if anything, steepen with inflation uncertainty as investors demand a larger risk premium to hold long-term bonds. Using the dispersion of inflation forecasts to measure this uncertainty, we find the opposite. The reason is that there is also greater disagreement in inflation expectations when uncertainty is high. Since the prices of long-term bonds are more sensitive to inflation than short-term ones, investors disagree more about long maturity payoffs. Optimists expecting low inflation then speculate and buy long maturities from pessimists who want to short. If pessimists are constrained from shorting, then long maturities become over-priced and the yield curve flattens. Short-sales constraints are more likely to bind when the disagreement is large and the Treasury supply low. We use this prediction to develop a difference-in-differences estimate to identify our reaching-for-maturity effect on the yield curve.

About the speaker:

Jialin Yu is an Associate Professor of Finance at HKUST Business School. Before, he worked as an Associate Professor at the Graduate School of Business, Columbia University. Dr. Yu received his Ph.D. in Economics from Princeton University and M.A. in Economics from the University of Iowa.

Dr. Yu’s research interest focuses on investments, behavioral finance, and Asian financial markets. He has published in leading academic journals including the Journal of Finance, Journal of Financial Markets, Journal of Financial Economics, and Journal of Econometrics. He teaches Financial Econometrics in the Ph.D. program, Capital Markets and Investments in the MBA program and Equity Investment Management in the master program.