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Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields

  • JENS H. E. CHRISTENSEN
  • JOSE A. LOPEZ
  • GLENN D. RUDEBUSCH

Differences between yields on comparable-maturity U.S. Treasury nominal and real debt, the so-called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage-free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long-term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average. Copyright (c) 2010 The Ohio State University No claim to original US government works.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 42 (2010)
Issue (Month): s1 (09)
Pages: 143-178

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Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:s1:p:143-178
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  12. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2009. "An arbitrage-free generalized Nelson--Siegel term structure model," Econometrics Journal, Royal Economic Society, vol. 12(3), pages C33-C64, November.
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