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TIPS, Inflation Expectations and the Financial Crisis

Author

Listed:
  • Thorsten Lehnert

    (Luxembourg School of Finance, University of Luxembourg)

  • Aleksandar Andonov

    (Limburg Institute of Financial Economics, Maastricht University)

  • Florian Bardong

    (Fixed Income Research, Barclays Global Investors, London)

Abstract

Previous research indicates that the US market for inflation-linked bonds is not efficient and that market inefficiencies can be exploited by informed traders who include survey estimations or inflation model forecasts in trades on break-even inflation. Results from this extended research over a time-period in which the TIPS market matured and increased in depth, while the volatility of real yields and inflation increased, confirm that TIPS market inefficiency was not temporary but persisted over the entire time period between 1997 and 2009. Using estimations generated by the Survey of Professional Forecasters or forecasts based on the Kothari and Shanken (2004) inflation model to construct a break-even trading strategy leads to excess returns over a static buy-and-hold strategy. These excess returns remain substantial even after accounting for trading costs. Furthermore, TIPS returns still include a substantial liquidity premium, which increased during the financial crisis.

Suggested Citation

  • Thorsten Lehnert & Aleksandar Andonov & Florian Bardong, 2009. "TIPS, Inflation Expectations and the Financial Crisis," LSF Research Working Paper Series 09-09, Luxembourg School of Finance, University of Luxembourg.
    • Handle: RePEc:crf:wpaper:09-09
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    References listed on IDEAS

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    Cited by:

    1. Michael D. Bauer, 2015. "Inflation Expectations and the News," International Journal of Central Banking, International Journal of Central Banking, vol. 11(2), pages 1-40, March.

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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