Inflation-Indexed Bonds and the Expectations Hypothesis

Carolin Pflueger and Luis Viceira ()

No 16903, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper empirically analyzes the Expectations Hypothesis (EH) in inflation-indexed (or real) bonds and in nominal bonds in the US and in the UK. We strongly reject the EH in inflation-indexed bonds, and also confirm and update the existing evidence rejecting the EH in nominal bonds. This rejection implies that the risk premium on both real and nominal bonds varies predictably over time. We also find strong evidence that the spread between the nominal and the real bond risk premium, or the break-even inflation risk premium, also varies over time. We argue that the time variation in real bond risk premia mostly likely reflects both a changing real interest rate risk premium and a changing liquidity risk premium, and that the variability in the nominal bond risk premia reflects a changing inflation risk premium. We estimate significant time series variability in the magnitude and sign of bond risk premia.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2011-03
New Economics Papers: this item is included in nep-cba and nep-upt
Note: AP ME
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Citations: View citations in EconPapers (23)

Published as Carolin E. Pflueger & Luis M. Viceira, 2011. "Inflation-Indexed Bonds and the Expectations Hypothesis," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 139-158, December.

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Journal Article: Inflation-Indexed Bonds and the Expectations Hypothesis (2011)
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