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

Frederik Lundtofte*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

5 Citations (Scopus)


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.

Original languageEnglish
JournalReview of Quantitative Finance and Accounting
Issue number4
Pages (from-to)715-740
Number of pages26
Publication statusPublished - 1 Jan 2013
Externally publishedYes


  • Incomplete information
  • Information quality
  • Learning
  • Term structure of interest rates


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