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Understanding Inflation-Indexed Bond Markets

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  • John Campbell
  • Robert Shiller
  • Luis Viceira

Abstract

This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the ?financial crisis of 2008. Break even inflation rates, calculated from inflation-indexed and nominal government bond yields, stabilized u

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File URL: http://icfpub.som.yale.edu/publications/2587
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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2587.

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Date of creation: 01 May 2009
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Handle: RePEc:ysm:somwrk:amz2587

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Web page: http://icf.som.yale.edu/
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References

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  1. Wachter, Jessica A., 2003. "Risk aversion and allocation to long-term bonds," Journal of Economic Theory, Elsevier, vol. 112(2), pages 325-333, October.
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  7. Marie Briere & Ombretta Signori, 2007. "Do Inflation-Linked Bonds Still Diversify?," Working Papers CEB 07-029.RS, ULB -- Universite Libre de Bruxelles.
  8. Jennifer Roush & William Dudley & Michelle Steinberg Ezer, 2008. "The case for TIPS: an examination of the costs and benefits," Staff Reports 353, Federal Reserve Bank of New York.
  9. John Y. Campbell, 1987. "Bond and Stock Returns in a Simple Exchange Model," NBER Working Papers 1509, National Bureau of Economic Research, Inc.
  10. John Y. Campbell & Adi Sunderam & Luis M. Viceira, 2009. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," NBER Working Papers 14701, National Bureau of Economic Research, Inc.
  11. Beechey, Meredith J. & Wright, Jonathan H., 2009. "The high-frequency impact of news on long-term yields and forward rates: Is it real?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 535-544, May.
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  13. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
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  21. John Y. Campbell & Luis M. Viceira, 1998. "Who Should Buy Long-Term Bonds?," NBER Working Papers 6801, National Bureau of Economic Research, Inc.
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  29. Ravi Bansal & Robert Dittmar & Dana Kiku, 2009. "Cointegration and Consumption Risks in Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1343-1375, March.
  30. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2010. "Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 143-178, 09.
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Citations

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Cited by:
  1. John Y. Campbell & Robert J. Shiller & Luis M. Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," Cowles Foundation Discussion Papers 1696, Cowles Foundation for Research in Economics, Yale University.
  2. Iryna Kaminska & Gabriele Zinna, 2014. "Official Demand for U.S. Debt: Implications for U.S. Real Interest Rates," IMF Working Papers 14/66, International Monetary Fund.
  3. Jens H.E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2012. "Extracting Deflation Probability Forecasts from Treasury Yields," International Journal of Central Banking, International Journal of Central Banking, vol. 8(4), pages 21-60, December.
  4. Carolin E. Pflueger & Luis M. Viceira, 2011. "Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity," Harvard Business School Working Papers 11-094, Harvard Business School, revised Sep 2013.
  5. Hans Dewachter & Leonardo Iania, 2010. "An Extended Macro-Finance Model with Financial Factors," CESifo Working Paper Series 2950, CESifo Group Munich.
  6. Alexander Schulz & Jelena Stapf, 2011. "Price discovery on traded inflation expectations: does the financial crisis matter?," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Initiatives to address data gaps revealed by the financial crisis", Basel, 25-26 August 2010, volume 34, pages 202-231 Bank for International Settlements.
  7. Hanno Lustig, 2011. "Why Does the Treasury Issue TIPS? The TIPS-Treasury Bond Puzzle," 2011 Meeting Papers 1443, Society for Economic Dynamics.
  8. Geert Bekaert & Xiaozheng Wang, 2010. "Inflation risk and the inflation risk premium," Economic Policy, CEPR & CES & MSH, vol. 25, pages 755-806, October.
  9. Cartea, Álvaro & Saúl, Jonatan & Toro, Juan, 2012. "Optimal portfolio choice in real terms: Measuring the benefits of TIPS," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 721-740.
  10. Max Gillman & Michal Kejak & Michal Pakos, 2014. "Learning about Rare Disasters: Implications for Consumptions and Asset Prices," CEU Working Papers 2014_2, Department of Economics, Central European University.
  11. Schulz, Alexander & Stapf, Jelena, 2009. "Price discovery on traded inflation expectations: does the financial crisis matter?," Discussion Paper Series 1: Economic Studies 2009,25, Deutsche Bundesbank, Research Centre.
  12. Kajuth, Florian & Watzka, Sebastian, 2011. "Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 225-235, June.
  13. Marini, François, 2011. "Financial intermediation in the theory of the risk-free rate," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1663-1668, July.
  14. Grishchenko, Olesya V., 2011. "Asset pricing in the production economy subject to monetary shocks," Journal of Economics and Business, Elsevier, vol. 63(3), pages 187-216, May.

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