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Indexed Bonds and Revisions of Inflation Expectations

  • Reschreiter, Andreas

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

This paper investigates the impact of revisions in inflation expectations on the prices of UK inflation-indexed and conventional government bonds with a vector autoregressive (VAR) model. Downwards revisions of inflation expectations are associated with unexpected increases in the prices of conventional bonds, but the prices of indexed bonds are not significantly affected. This suggests that indexed bonds protect investors against inflation while nominal bonds are exposed to changing monetary conditions. This is consistent with the view that indexed bonds avoid the inflation risk premium of conventional bonds and reduce the government's long-run borrowing costs.

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File URL: http://www.ihs.ac.at/publications/eco/es-199.pdf
File Function: First version, 2006
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Paper provided by Institute for Advanced Studies in its series Economics Series with number 199.

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Length: 20 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:ihs:ihsesp:199
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Order Information: Postal: Institute for Advanced Studies - Library, Stumpergasse 56, A-1060 Vienna, Austria

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  1. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," NBER Working Papers 2511, National Bureau of Economic Research, Inc.
  2. Reschreiter, Andreas, 2004. "Conditional funding costs of inflation-indexed and conventional government bonds," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1299-1318, June.
  3. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
  4. Barr, David & Campbell, John, 1997. "Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices," Scholarly Articles 3163261, Harvard University Department of Economics.
  5. Andrew Ang & Geert Bekaert & Min Wei, 2008. "The Term Structure of Real Rates and Expected Inflation," Journal of Finance, American Finance Association, vol. 63(2), pages 797-849, 04.
  6. Campbell, J.Y. & Ammer, J., 1991. "What Moves The Stock And Bond Markets? A Variance Decomposition For Long- Term Asset Returns," Papers 127, Princeton, Department of Economics - Financial Research Center.
  7. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Working Papers 5587, National Bureau of Economic Research, Inc.
  8. Owen Lamont, 1999. "Economic Tracking Portfolios," NBER Working Papers 7055, National Bureau of Economic Research, Inc.
  9. Andreas Reschreiter, 2010. "The inflation protection from indexed bonds," Applied Economics Letters, Taylor & Francis Journals, vol. 17(16), pages 1581-1585.
  10. LuisM. Viceira & John Y. Campbell, 2001. "Who Should Buy Long-Term Bonds?," American Economic Review, American Economic Association, vol. 91(1), pages 99-127, March.
  11. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, 08.
  12. Michael Joyce & Vicky Read, 2002. "Asset price reactions to RPI announcements," Applied Financial Economics, Taylor & Francis Journals, vol. 12(4), pages 253-270.
  13. Reschreiter, Andreas, 2008. "Lower borrowing costs with inflation-indexed bonds: A trading rule based assessment," Economics Letters, Elsevier, vol. 99(2), pages 272-274, May.
  14. Mark Deacon & Andrew Derry, 1994. "Deriving Estimates of Inflation Expectations from the Prices of UK Government Bonds," Bank of England working papers 23, Bank of England.
  15. Buraschi, Andrea & Jiltsov, Alexei, 2005. "Inflation risk premia and the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 75(2), pages 429-490, February.
  16. Robert J. Shiller, 1996. "Why Do People Dislike Inflation?," Cowles Foundation Discussion Papers 1115, Cowles Foundation for Research in Economics, Yale University.
  17. Jacob Boudoukh, 1993. "An equilibrium model of nominal bond prices with inflation-output correlation and stochastic volatility," Proceedings, Federal Reserve Bank of Cleveland, pages 636-680.
  18. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  19. Robert L. Hetzel, 1992. "Indexed bonds as an aid to monetary policy," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 13-23.
  20. David G. Barr & Bahram Pesaran, 2000. "An Assessment Of The Relative Importance Of Real Interest Rates, Inflation, And Term Premiums In Determining The Prices Of Real And Nominal U.K. Bonds," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 362-366, August.
  21. Peter S. Spiro, 2003. "Evidence on inflation expectations from Canadian real return bonds," Macroeconomics 0312004, EconWPA.
  22. Andreas Reschreiter, 2004. "Risk factors of inflation-indexed and conventional government bonds and the APT," Money Macro and Finance (MMF) Research Group Conference 2003 79, Money Macro and Finance Research Group.
  23. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Data," Harvard Institute of Economic Research Working Papers 1758, Harvard - Institute of Economic Research.
  24. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
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