TIPS, Inflation Expectations and the Financial Crisis
AbstractPrevious research indicates that the US market for inflation-linked bonds is not efficient and that market inefficiencies can be exploited by informed traders who include survey estimations or inflation model forecasts in trades on break-even inflation. Results from this extended research over a time-period in which the TIPS market matured and increased in depth, while the volatility of real yields and inflation increased, confirm that TIPS market inefficiency was not temporary but persisted over the entire time period between 1997 and 2009. Using estimations generated by the Survey of Professional Forecasters or forecasts based on the Kothari and Shanken (2004) inflation model to construct a break-even trading strategy leads to excess returns over a static buy-and-hold strategy. These excess returns remain substantial even after accounting for trading costs. Furthermore, TIPS returns still include a substantial liquidity premium, which increased during the financial crisis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 09-09.
Date of creation: 2009
Date of revision:
Contact details of provider:
Postal: 148, avenue de la Faïencerie, L-1511 Luxembourg
Phone: +352 46 66 44 6807
Fax: +352 46 66 44 6811
Web page: http://www.lsf.lu/eng
More information through EDIRC
TIPS; market; inflation expectations; survey of Professional Forecasters; financial crisis;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-10 (All new papers)
- NEP-CBA-2010-01-10 (Central Banking)
- NEP-FMK-2010-01-10 (Financial Markets)
- NEP-MAC-2010-01-10 (Macroeconomics)
- NEP-MON-2010-01-10 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Söderlind, Paul, 2000.
"Inflation Forecast Uncertainty,"
CEPR Discussion Papers
2499, C.E.P.R. Discussion Papers.
- Jeffrey M. Wrase, 1997. "Inflation-indexed bonds: how do they work?," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 3-16.
- Refet S. Gürkaynak & Brian Sack & Jonathan H. Wright, 2008. "The TIPS yield curve and inflation compensation," Finance and Economics Discussion Series 2008-05, Board of Governors of the Federal Reserve System (U.S.).
- Mark M. Spiegel, 1998. "Central bank independence and inflation expectations: evidence from British index-linked gilts," Economic Review, Federal Reserve Bank of San Francisco, pages 3-14.
- Brian Sack, 2000. "Deriving inflation expectations from nominal and inflation-indexed Treasury yields," Finance and Economics Discussion Series 2000-33, Board of Governors of the Federal Reserve System (U.S.).
- Charles T. Carlstrom & Timothy S. Fuerst, 2004. "Expected inflation and TIPS," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
- Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
- Florian Bardong & Thorsten Lehnert, 2008. "TIPS and inflation expectations," Applied Economics Letters, Taylor and Francis Journals, vol. 15(7), pages 513-517.
- John Y. Campbell & Robert J. Shiller, 1996.
"A Scorecard for Indexed Government Debt,"
Cowles Foundation Discussion Papers
1125, Cowles Foundation for Research in Economics, Yale University.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caroline Herfroy).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.