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Conditional Indexation Bias in Yields Reported on Inflation-Indexed Securities with Special Reference to UDIBONOS and TIPS

Author Info

Listed author(s):
  • George M. von Furstenberg

    (Department of Economics, Indiana University. Bloomington, IN. USA)

  • Michael T. Gapen

    (Department of Economics, Indiana University. Bloomington, IN. USA.)

Abstract

The real rate of return on inflation-indexed government securities is calculated and published as if indexation succeeded perfectly in keeping the real value of coupon and principal payments unchanged. In fact the procedure of indexing to the lagged momentum of the seasonally unadjusted CPI gives rise to three types of indexation bias that may change the expected real value of the future stream of payments in relation to the current par value. These biases are due to i) seasonality, ii) non-seasonal fluctuations in reported inflation rates, and iii) any expected “permanent” changes in future rates of inflation (or the reporting thereof) being capable of creating predictable changes in the real value of the inflation-adjusted principal with the indexation procedure actually in force. They are one more, directly quantifiable, reason why the reported yields do not provide the long-sought definite revelation of the riskless real rate of interest and hence of the expected rate of inflation by comparison with nominal interest rates.

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File URL: http://www.economiamexicana.cide.edu/num_anteriores/VII-2/01_FURSTENBERG_149-188.pdf
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Article provided by in its journal Economia Mexicana NUEVA EPOCA.

Volume (Year): VII (1998)
Issue (Month): 2 (July-December)
Pages: 149-188

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Handle: RePEc:emc:ecomex:v:7:y:1998:i:2:p:149-188
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  1. Soderlind, Paul & Svensson, Lars, 1997. "New techniques to extract market expectations from financial instruments," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 383-429, October.
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Cited by:

  1. J. Huston McCulloch & Levin A. Kochen, 1998. "The Inflation Premium Implicit in the US Real and Nominal Term Structures of Interest Rates," Working Papers 98-12, Ohio State University, Department of Economics.

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