IDEAS home Printed from
   My bibliography  Save this article

How important is the inflation risk premium?


  • Pu Shen


Investors and market analysts generally believe that the yield on a nominal bond includes an inflation risk premium to compensate investors for bearing the inflation risk associated with the bond. Knowing how much of a risk premium investors require on nominal bonds can be valuable information for policymakers. For government Treasuries, the size of the risk premium represents the potential interest savings for governments when nominal securities are replaced with real, or inflation-indexed, securities. And, because the inflation risk premium reflects perceived inflation uncertainty, changes in the size of the risk premium can reveal to monetary policymakers how credible their policy actions are in the marketplace. Unfortunately, empirical evidence on the actual size of the inflation risk premium and its response to market events is scarce.> To address these empirical shortcomings, Shen uses data from the United Kingdom, where about 20 percent of outstanding government debt is in the form of real bonds. She finds that the inflation risk premium in nominal government bonds is sizable. She also finds that information regarding the inflation risk premium may give useful insight to monetary policymakers. For example, changes in the estimated inflation risk premium in the UK in the second half of 1992 suggest that the announcement of an explicit inflation target did not gain instant credibility with financial market participants.

Suggested Citation

  • Pu Shen, 1998. "How important is the inflation risk premium?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 35-47.
  • Handle: RePEc:fip:fedker:y:1998:i:qiv:p:35-47:n:v.83no.4

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Chen, Ren-Raw & Liu, Bo & Cheng, Xiaolin, 2010. "Pricing the term structure of inflation risk premia: Theory and evidence from TIPS," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 702-721, September.
    2. Christophe, Faugere, 2003. "A Required Yield Theory of Stock Market Valuation and Treasury Yield Determination," MPRA Paper 15579, University Library of Munich, Germany, revised 04 Jun 2009.
    3. Pu Shen & Jonathan Corning, 2001. "Can TIPS help identify long-term inflation expectations?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 61-87.
    4. Jylhä, Petri & Suominen, Matti, 2011. "Speculative capital and currency carry trades," Journal of Financial Economics, Elsevier, vol. 99(1), pages 60-75, January.
    5. Zeng, Zheng, 2013. "New tips from TIPS: Identifying inflation expectations and the risk premia of break-even inflation," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 125-139.

    More about this item


    Inflation (Finance) ; Bonds;


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:1998:i:qiv:p:35-47:n:v.83no.4. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LDayrit). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.