An Empirical Investigation of Bond Prices and Inflation
This paper investigates the dynamics of real interest rates and inflation in the context of an equilibrium asset pricing model. Formulas for bond prices and optimal forecasts of inflation are shown to form a state space system. The model’s parameters are estimated by maximum likelihood, using a Kalman filter to compute the likelihood function. The estimation uses time series data on Treasury bill prices of various maturities and survey forecasts of inflation. The results suggest chat the stochastic processes for real interest rates and expected inflation are mutually dependent; innovations in the processes display significant negative correlation while expected changes in each variable are significantly positively related to the level of the other variable. There is evidence that over the past decade inflation and real interest rates have displayed somewhat less mean reversion than previously. Distinguishing real rates from expected inflation is likely to lead to gains in interest rate modelling.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: 3254 Steinberg Hall-Dietrich Hall, Philadelphia, PA 19104-6367|
Phone: (215) 898-7616
Fax: (215) 573-8084
Web page: http://finance.wharton.upenn.edu/~rlwctr/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:fth:pennfi:17-88. 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: (Thomas Krichel)
If references are entirely missing, you can add them using this form.