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The informational content of the embedded deflation option in TIPS

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  • Grishchenko, Olesya V.
  • Vanden, Joel M.
  • Zhang, Jianing

Abstract

We estimate the value of the embedded option in U.S. Treasury Inflation-Protected Securities (TIPS). The embedded option value exhibits time variation that is correlated with periods of deflationary expectations. We construct embedded option explanatory variables that are statistically and economically significant for explaining future inflation, even in the presence of traditional inflation variables such as lagged inflation, the gold return, the crude oil return, the VIX return, liquidity, surveys, and the yield spread between nominal Treasuries and TIPS. After conducting robustness tests, we conclude that the TIPS embedded option contains useful information for future inflation.

Suggested Citation

  • Grishchenko, Olesya V. & Vanden, Joel M. & Zhang, Jianing, 2016. "The informational content of the embedded deflation option in TIPS," Journal of Banking & Finance, Elsevier, vol. 65(C), pages 1-26.
    • Handle: RePEc:eee:jbfina:v:65:y:2016:i:c:p:1-26
    DOI: 10.1016/j.jbankfin.2015.12.004
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    More about this item

    Keywords

    TIPS; Embedded option; Inflation; Deflation; Term structure;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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

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