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Indexed Bonds and Revisions of Inflation Expectations

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  • Reschreiter, Andreas

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

Abstract

This paper investigates the impact of revisions in inflation expectations on the prices of UK inflation-indexed and conventional government bonds with a vector autoregressive (VAR) model. Downwards revisions of inflation expectations are associated with unexpected increases in the prices of conventional bonds, but the prices of indexed bonds are not significantly affected. This suggests that indexed bonds protect investors against inflation while nominal bonds are exposed to changing monetary conditions. This is consistent with the view that indexed bonds avoid the inflation risk premium of conventional bonds and reduce the government's long-run borrowing costs.

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File URL: http://www.ihs.ac.at/publications/eco/es-199.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 199.

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Length: 20 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:ihs:ihsesp:199

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Postal: Institute for Advanced Studies - Library, Stumpergasse 56, A-1060 Vienna, Austria

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Keywords: Conventional and indexed bonds; Inflation; Macroeconomy; VAR;

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References

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  1. Owen Lamont, . "Economic Tracking Portfolios."," CRSP working papers 489, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Working Papers 5587, National Bureau of Economic Research, Inc.
  3. Robert L. Hetzel, 1992. "Indexed bonds as an aid to monetary policy," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 13-23.
  4. Andrew Ang & Geert Bekaert, 2004. "The term structure of real rates and expected inflation," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  5. Andreas Reschreiter, 2010. "The inflation protection from indexed bonds," Applied Economics Letters, Taylor & Francis Journals, vol. 17(16), pages 1581-1585.
  6. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, 08.
  7. Jacob Boudoukh, 1993. "An equilibrium model of nominal bond prices with inflation-output correlation and stochastic volatility," Proceedings, Federal Reserve Bank of Cleveland, pages 636-680.
  8. John Y. Campbell & Luis M. Viceira, 2000. "Who Should Buy Long-Term Bonds?," Harvard Institute of Economic Research Working Papers 1895, Harvard - Institute of Economic Research.
  9. Campbell, John Y & Ammer, John, 1993. " What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance, American Finance Association, vol. 48(1), pages 3-37, March.
  10. Peter S. Spiro, 2003. "Evidence on inflation expectations from Canadian real return bonds," Macroeconomics 0312004, EconWPA.
  11. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," Cowles Foundation Discussion Papers 858, Cowles Foundation for Research in Economics, Yale University.
  12. Buraschi, Andrea & Jiltsov, Alexei, 2005. "Inflation risk premia and the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 75(2), pages 429-490, February.
  13. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  14. Mark Deacon & Andrew Derry, 1994. "Deriving Estimates of Inflation Expectations from the Prices of UK Government Bonds," Bank of England working papers 23, Bank of England.
  15. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  16. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  17. 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.
  18. Reschreiter, Andreas, 2008. "Lower borrowing costs with inflation-indexed bonds: A trading rule based assessment," Economics Letters, Elsevier, vol. 99(2), pages 272-274, May.
  19. Robert J. Shiller, 1997. "Why Do People Dislike Inflation?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 13-70 National Bureau of Economic Research, Inc.
  20. Michael Joyce & Vicky Read, 2002. "Asset price reactions to RPI announcements," Applied Financial Economics, Taylor & Francis Journals, vol. 12(4), pages 253-270.
  21. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Data," Harvard Institute of Economic Research Working Papers 1758, Harvard - Institute of Economic Research.
  22. Reschreiter, Andreas, 2004. "Conditional funding costs of inflation-indexed and conventional government bonds," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1299-1318, June.
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Citations

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Cited by:
  1. Reschreiter, Andreas, 2008. "Lower borrowing costs with inflation-indexed bonds: A trading rule based assessment," Economics Letters, Elsevier, vol. 99(2), pages 272-274, May.
  2. Benlagha, N., 2013. "Co-movement of Index linked bonds and conventional bonds in France: Subprime crisis and Structural Break, 2003-01, 2012-04," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(1), pages 55-66.
  3. Noureddine Benlagha, 2013. "The Long-run Relationship among Index-linked Bonds and Conventional Bonds," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 15-24, February.

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