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Lower borrowing costs with inflation-indexed bonds: A trading rule based assessment

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  • Reschreiter, Andreas

Abstract

A simple trading rule invests in long-term bonds or the risk-free asset based on publicly observed economic variables. The results indicate a predictable inflation risk premium for conventional bonds but no ex-ante risk compensation for indexed bonds. This suggests the government can achieve lower funding costs by issuing indexed debt.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 99 (2008)
Issue (Month): 2 (May)
Pages: 272-274

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Handle: RePEc:eee:ecolet:v:99:y:2008:i:2:p:272-274

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Web page: http://www.elsevier.com/locate/ecolet

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  1. Pesaran, M Hashem & Timmermann, Allan, 1995. " Predictability of Stock Returns: Robustness and Economic Significance," Journal of Finance, American Finance Association, American Finance Association, vol. 50(4), pages 1201-28, September.
  2. Campbell, John, 1995. "Some Lessons from the Yield Curve," Scholarly Articles 3163264, Harvard University Department of Economics.
  3. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 101(405), pages 157-79, March.
  4. Campbell, John, 2000. "Asset Pricing at the Millennium," Scholarly Articles 3294737, Harvard University Department of Economics.
  5. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1125, Cowles Foundation for Research in Economics, Yale University.
  6. Robert T. Price, 1997. "The Rationale and Design of Inflation-Indexed Bonds," IMF Working Papers 97/12, International Monetary Fund.
  7. Andreas Reschreiter, 2004. "Risk factors of inflation-indexed and conventional government bonds and the APT," Money Macro and Finance (MMF) Research Group Conference 2003 79, Money Macro and Finance Research Group.
  8. Andreas Reschreiter, 2010. "Indexed bonds and revisions of inflation expectations," Annals of Finance, Springer, Springer, vol. 6(4), pages 537-554, October.
  9. Reschreiter, Andreas, 2004. "Conditional funding costs of inflation-indexed and conventional government bonds," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(6), pages 1299-1318, June.
  10. Frank F. Gong & Eli M. Remolona, 1996. "Inflation risk in the U.S. yield curve: the usefulness of indexed bonds," Research Paper 9637, Federal Reserve Bank of New York.
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Cited by:
  1. Reschreiter, Andreas, 2011. "The effects of the monetary policy regime shift to inflation targeting on the real interest rate in the United Kingdom," Economic Modelling, Elsevier, vol. 28(1-2), pages 754-759, January.
  2. Andreas Reschreiter, 2010. "Indexed bonds and revisions of inflation expectations," Annals of Finance, Springer, Springer, vol. 6(4), pages 537-554, October.
  3. Geert Bekaert & Xiaozheng Wang, 2010. "Inflation risk and the inflation risk premium," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 25, pages 755-806, October.

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