Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices
| Autor: | Stefania D'Amico, Don H. Kim, Min Wei |
|---|---|
| Rok vydání: | 2008 |
| Předmět: |
Inflation
Economics and Econometrics Risk premium media_common.quotation_subject jel:E43 jel:E44 term structure model inflation expectation inflation risk premium SPF Treasury Inflation-Protected Securities (TIPS) Monetary economics jel:G01 Inflation rate Accounting 0502 economics and business Liquidity (Economics) Inflation (Finance) Economics 050207 economics media_common 050208 finance Government securities Bond 05 social sciences jel:G12 Deflation Liquidity premium Interest rate Treasury Market liquidity Basis point Financial crisis TIPS Breakeven No-arbitrage term structure model Liquidity Expected inflation Inflation risk premium Survey forecasts Indexation lag Deflation floor Finance Affine term structure model |
| Popis: | TIPS breakeven inflation rate, defined as the difference between nominal and TIPS yields of comparable maturities, is potentially useful as a real-time measure of market inflation expectations. In this paper, we provide evidence that a fairly large TIPS liquidity premium existed until recently, using a multifactor no-arbitrage term structure model estimated with nominal and TIPS yields, inflation and survey forecasts of interest rates. Ignoring the TIPS liquidity premiums leads to counterintuitive implications for inflation expectations and inflation risk premium, and produces large pricing errors for TIPS. In contrast, models incorporating a TIPS liquidity factor generate much better fit for these variables and reveal a TIPS liquidity premium that was until recently quite large (~1%) but has come down in recent years, consistent with the common perception that TIPS market grew and liquidity conditions improved. Our results indicate that after taking proper account of the liquidity conditions in the TIPS market, the movement in TIPS breakeven inflation rate can provide useful information for identifying real yields, expected inflation and inflation risk premium. |
| Databáze: | OpenAIRE |
| Externí odkaz: |
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