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The impact of liquidity on inflation-linked bonds: A hypothetical indexed bonds approach

Author

Listed:
  • Julia Auckenthaler

    ()

  • Alexander Kupfer

    ()

  • Rupert Sendlhofer

    ()

Abstract

The sovereign�s intention to issue inflation-linked bonds (ILB) is to save money. More than 15 years� experience with this financial instrument in the United States and in several other countries has led to the conclusion that these bonds are costly and basically characterized by low liquidity issues. Recently, various papers have started to analyze the impact of liquidity on ILB yields. This paper summarizes studies concerning ILB liquidity at a glance and adds a new estimation strategy of the liquidity premium based on Campbell & Shiller�s (1996) hypothetical ILB yields. We calculate the difference between observed and hypothetical ILB yields, regress this time series on a set of ILB-specific liquidity as well as general market uncertainty measures and find statistically and economically significant effects of the liquidity measures for the United States, the United Kingdom and Canada.

Suggested Citation

  • Julia Auckenthaler & Alexander Kupfer & Rupert Sendlhofer, 2014. "The impact of liquidity on inflation-linked bonds: A hypothetical indexed bonds approach," Working Papers 2014-05, Faculty of Economics and Statistics, University of Innsbruck.
  • Handle: RePEc:inn:wpaper:2014-05
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    References listed on IDEAS

    as
    1. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Chapters,in: NBER Macroeconomics Annual 1996, Volume 11, pages 155-208 National Bureau of Economic Research, Inc.
    2. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
    3. Olesya V. Grishchenko & Jing-zhi Huang, 2012. "Inflation risk premium: evidence from the TIPS market," Finance and Economics Discussion Series 2012-06, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Inflation-linked bonds; liquidity; hypothetical yields;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G01 - Financial Economics - - General - - - Financial Crises
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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