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TIPS Liquidity Premium and Quantitative Easing

Author

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  • Laura Coroneo

Abstract

In the context of a state-space model for nominal and TIPS yields, we identify the liquidity premium in the TIPS market as the common component in TIPS yields unspanned by nominal yields. Using daily US yields, we find that the TIPS liquidity premium explains up to 22% of the variation in TIPS yields and that it sharply spiked during the recent financial crisis. A counterfactual exercise shows that the QE2 program had only limited effects on the liquidity premium in the TIPS market.

Suggested Citation

  • Laura Coroneo, 2015. "TIPS Liquidity Premium and Quantitative Easing," Discussion Papers 15/23, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:15/23
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    More about this item

    Keywords

    TIPS; Liquidity Premium; Factor models; Quantitative Easing;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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