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Indexed bonds and revisions of inflation expectations

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  • Andreas Reschreiter

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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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Suggested Citation

  • Andreas Reschreiter, 2010. "Indexed bonds and revisions of inflation expectations," Annals of Finance, Springer, vol. 6(4), pages 537-554, October.
  • Handle: RePEc:kap:annfin:v:6:y:2010:i:4:p:537-554
    DOI: 10.1007/s10436-010-0148-4
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Chen, Shu-Hua, 2015. "Macroeconomic (In)Stability Of Interest Rate Rules In A Model With Banking System And Reserve Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 19(07), pages 1476-1508, October.
    3. 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.
    4. Covarrubias, Enrique & Hernández-del-Valle, Gerardo, 2016. "Inflation expectations derived from a portfolio model," MPRA Paper 69489, University Library of Munich, Germany.
    5. 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.

    More about this item

    Keywords

    Indexed bonds; Inflation; Debt management; Borrowing costs; Macroeconomy; VAR; E43; G12; H63;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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