 The impact of liquidity on inflation-linked bonds: A hypothetical indexed bonds approachJulia Auckenthaler, Alexander Kupfer and Rupert Sendlhofer The North American Journal of Economics and Finance, 2015, vol. 32, issue C, 139-154 Abstract: Sovereigns mainly issue inflation-linked bonds (ILB) in order to save money. More than 15 years’ experience with this financial instrument in the United States has led to the conclusion that these bonds are characterized by low liquidity issues. Recently, various papers have started to analyze the impact of liquidity on ILB yields. This paper develops a new strategy for estimating the liquidity premium based on Campbell and Shiller's (1996) hypothetical ILB yields. We find significant effects of ILB-specific liquidity measures for the United States, the United Kingdom and Canada. Based on these findings, we derive the liquidity premium in ILB yields, liquidity-adjusted estimates for the break-even inflation rate and the inflation risk premium. In the United States, for instance, the average of the liquidity premium is 0.56%-points, and the average liquidity-adjusted break-even inflation rate and inflation risk premium amount to 2.67%-points and 0.22%-points, respectively. Keywords: Inflation-linked bonds; Hypothetical bond yields; Liquidity premium; Inflation risk premium; Break-even inflation rate (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:32:y:2015:i:c:p:139-154 DOI: 10.1016/j.najef.2015.02.001 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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