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The informational content of the embedded deflation option in TIPS

Olesya Grishchenko (), Joel M. Vanden and Jianing Zhang

Journal of Banking & Finance, 2016, vol. 65, issue C, 1-26

Abstract: We estimate the value of the embedded option in U.S. Treasury Inflation-Protected Securities (TIPS). The embedded option value exhibits time variation that is correlated with periods of deflationary expectations. We construct embedded option explanatory variables that are statistically and economically significant for explaining future inflation, even in the presence of traditional inflation variables such as lagged inflation, the gold return, the crude oil return, the VIX return, liquidity, surveys, and the yield spread between nominal Treasuries and TIPS. After conducting robustness tests, we conclude that the TIPS embedded option contains useful information for future inflation.

Keywords: TIPS; Embedded option; Inflation; Deflation; Term structure (search for similar items in EconPapers)
JEL-codes: E31 G12 E43 E44 (search for similar items in EconPapers)
Date: 2016
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Working Paper: The informational content of the embedded deflation option in TIPS (2013) Downloads
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Handle: RePEc:eee:jbfina:v:65:y:2016:i:c:p:1-26