Bond futures, inflation-indexed bonds, and inflation risk premium

Angelos Kanas

Journal of International Financial Markets, Institutions and Money, 2014, vol. 28, issue C, 82-99

Abstract: We propose a new approach to measuring long-run inflation risk, the inflation risk premium, and inflation expectations for the UK over the period 1985–2012. By adding long-term bond futures to the information set of inflation-indexed and nominal bonds, inflation risk is measured as an incremental time-varying covariance obtained from a trivariate GARCH model with dynamic conditional correlations (DCC). The time-varying inflation risk premium and inflation expectations are extracted from the breakeven yield using the risk premium obtained from the previous step. We find that the risk premium has been decreasing over the sample period, with an average value of 87 basis points. The estimated long-run inflation expectations suggest that credibility has been improving over the period of inflation targeting policy, and are in line with the role of inflation targeting policy in anchoring expectations.

Keywords: Bond futures; Inflation-indexed bonds; Inflation risk premium; Inflation expectations; Inflation targeting (search for similar items in EconPapers)
JEL-codes: E43 G12 G14 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:28:y:2014:i:c:p:82-99

DOI: 10.1016/j.intfin.2013.09.007

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