1 Department of Finance, Copenhagen Business School2 Korea Advanced Institute of Science and Technology
Risk-Premia or Expectational Errors?
Our results challenge the traditional way we interpret empirical measures of risk premia, as a signicant part of the predictable component of excess returns is strongly correlated with predictability in survey forecast errors. Using survey forecasts of the federal funds rate to proxy for market expectations, we show that the predictable component of excess returns can not be attributed to risk premia in the fed funds futures market. We argue that the documented biases in futures forecasts of monetary policy, which were previously characterized as risk premia (Piazzesi and Swanson, 2008), are driven primarily by expectational errors.