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

Julia Auckenthaler (), Alexander Kupfer () and Rupert Sendlhofer ()

Working Papers from Faculty of Economics and Statistics, Universität Innsbruck

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.

Keywords: Inflation-linked bonds; liquidity; hypothetical yields (search for similar items in EconPapers)
JEL-codes: G01 G12 H63 (search for similar items in EconPapers)
Pages: 28
Date: 2014-03
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:inn:wpaper:2014-05

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