Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia

Florian Kajuth and Sebastian Watzka

The Quarterly Review of Economics and Finance, 2011, vol. 51, issue 3, 225-235

Abstract: Abstract We propose a novel method to correct break-even inflation rates derived from index-linked bonds for liquidity and inflation risk premia without resorting to survey based measures. In a state-space framework the difference between break-even inflation rates and unobserved true inflation expectation is explained by measures of time-varying liquidity and inflation risk premia. Our results have better forecasting performance for the average annual inflation rate over the following 10 years than raw break-even rates and the Survey of Professional Forecasters.

Keywords: Inflation; expectations; Liquidity; risk; premium; Inflation; risk; premium; Treasury; inflation-protected; securities; (TIPS); State-space; model (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (11)

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Working Paper: Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia (2011)
Working Paper: Inflation expectations from index-linked bonds: Correcting for liquidity and inflation risk premia (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:51:y:2011:i:3:p:225-235

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