Inflation risk premium: evidence from the TIPS market
``Inflation-indexed securities would appear to be the most direct source of information about inflation expectations and real interest rates" (Bernanke, 2004). In this paper we study the term structure of real interest rates, expected inflation and inflation risk premia using data on prices of Treasury Inflation Protected Securities (TIPS) over the period 2000-2008. The approach we use to estimate inflation risk premium is arbitrage free, largely model free, and easy to implement. We also make distinction between TIPS yields and real yields and take into account explicitly the three-month indexation lag of TIPS in the analysis. In addition, we propose a new liquidity measure based on TIPS prices. Accounting for it, we find that the inflation risk premium is time-varying: it is negative (positive) in the first (second) half of the sample period. The average 10-year inflation risk premium ranges from -16 to 10 basis points over the full sample depending on the proxy used for expected inflation. More specifically, the estimates of the 10-year inflation risk premium range between 14 and 19 basis points for 2004-2008 period.
|Date of creation:||2012|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gürkaynak, Refet S. & Wright, Jonathan, 2010.
"Macroeconomics and the Term Structure,"
CEPR Discussion Papers
8018, C.E.P.R. Discussion Papers.
- Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280-280.
- Robert Jarrow & Yildiray Yildirim, 2008.
"Pricing Treasury Inflation Protected Securities and Related Derivatives using an HJM Model,"
World Scientific Book Chapters,
in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 16, pages 349-370
World Scientific Publishing Co. Pte. Ltd..
- Jarrow, Robert & Yildirim, Yildiray, 2003. "Pricing Treasury Inflation Protected Securities and Related Derivatives using an HJM Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(02), pages 337-358, June.
- Buraschi, Andrea & Jiltsov, Alexei, 2005. "Inflation risk premia and the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 75(2), pages 429-490, February.
- Albert Lee Chun, 2005.
"Expectations, Bond Yields and Monetary Policy,"
04-023, Stanford Institute for Economic Policy Research, revised Nov 2010.
- Andrew Ang & Geert Bekaert & Min Wei, 2005.
"Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?,"
NBER Working Papers
11538, National Bureau of Economic Research, Inc.
- Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1163-1212, May.
- Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series 2006-15, Board of Governors of the Federal Reserve System (U.S.).
- Philippe Mueller & Mikhail Chernov, 2008.
"The Term Structure of Inflation Expectations,"
2008 Meeting Papers
346, Society for Economic Dynamics.
- repec:hrv:faseco:3128709 is not listed on IDEAS
- Refet S. Gürkaynak & Brian Sack & Jonathan H. Wright, 2010.
"The TIPS Yield Curve and Inflation Compensation,"
American Economic Journal: Macroeconomics,
American Economic Association, vol. 2(1), pages 70-92, January.
When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2012-06. 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: (Franz Osorio)
If references are entirely missing, you can add them using this form.