Pricing inflation-linked bonds

Paolo Falbo, Francesco Paris and Cristian Pelizzari

Quantitative Finance, 2010, vol. 10, issue 3, 279-293

Abstract: This paper proposes a pricing model for inflation-linked bonds. Our proposal is developed starting from a Vasicek model of the instantaneous inflation rate process and the Cox, Ingersoll and Ross model for the nominal instantaneous risk-free interest rate process. Instead of adopting the standard approach of a cross-section estimation of the term structure of real interest rates, this work proposes a pricing model based on estimation of the inflation risk premium. The model is applied to Treasury Inflation Protected Securities, which are inflation-linked bonds issued by the U.S. Department of the Treasury. Empirical validation is carried out on data for the period 1999-2005.

Keywords: Interest rates; Inflation-linked bonds; Continuous time stochastic models; Inflation rates; Treasury Inflation Protected Securities (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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DOI: 10.1080/14697680802613057

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