The large volume of loan transactions suggests widely divergent beliefs among borrowers and lenders, but most modern term structure theories make no prediction about volume because they assume homogeneous agents. Within these rational expectations, representative agent theories, loans are not only in zero net supply; they are also in zero gross supply. Here, the shape of the average term structure, the bias in forward interest rates, and the volume of transactions are discussed in a heuristic setting with heterogeneity and incomplete rationality. A reconciliation of heterogeneity with continuous–time term structure theory is attempted, but the results are not encouraging. Empirical data are consistent with the importance of heterogeneous beliefs.
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Richard Roll (1997) studied this question.