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Pricing inflation-linked bonds

Author

Listed:
  • Paolo Falbo
  • Francesco Paris
  • Cristian Pelizzari

Abstract

This paper proposes a pricing model for inflation-linked bonds. Our proposal is developed starting from a Vasicek model of the instantaneous inflation rate process and the Cox, Ingersoll and Ross model for the nominal instantaneous risk-free interest rate process. Instead of adopting the standard approach of a cross-section estimation of the term structure of real interest rates, this work proposes a pricing model based on estimation of the inflation risk premium. The model is applied to Treasury Inflation Protected Securities, which are inflation-linked bonds issued by the U.S. Department of the Treasury. Empirical validation is carried out on data for the period 1999-2005.

Suggested Citation

  • Paolo Falbo & Francesco Paris & Cristian Pelizzari, 2010. "Pricing inflation-linked bonds," Quantitative Finance, Taylor & Francis Journals, vol. 10(3), pages 279-293.
    • Handle: RePEc:taf:quantf:v:10:y:2010:i:3:p:279-293
    DOI: 10.1080/14697680802613057
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    Cited by:

    1. Qiming Zhang & Linda Yin-nor Tjia & Biyue Wang & Aksel Ersoy, 2021. "Sustainable Construction and Financing—Asset-Backed Securitization of Expressway’s Usufruct with Redeemable Rights," Sustainability, MDPI, vol. 13(16), pages 1-17, August.
    2. Bohnert, Alexander & Gatzert, Nadine & Kolb, Andreas, 2016. "Assessing inflation risk in non-life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 66(C), pages 86-96.
    3. Gatzert, Nadine & Vogl, Nikolai, 2016. "Evaluating investments in renewable energy under policy risks," Energy Policy, Elsevier, vol. 95(C), pages 238-252.

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