Price pressures in the UK index-linked market: an empirical investigation

Gabriele Zinna

No 968, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We investigate the impact of long term investors' demand for UK index-linked gilts on the term structure of real rates for the 1987-2012 period. This is done by carrying out a structural estimation of the preferred-habitat model of Vayanos and Vila (2009). We use data on long-term investors' holdings of inflation-linked gilts by long-term investors, issuance of index-linked bonds and average maturity to identify the impact of supply/demand imbalances on rates. We find that demand pressure from long-term investors contributed to the decline in longer-term real rates over the 1987-2012 period by compressing bond risk premia. Before 2000, the fall in rates is largely due to the in-creasing demand pressure exerted by UK pension funds. Foreign institutional investors' demand in-stead played an important role in the subsequent decade.

Keywords: institutional investors; term structure of real rates; price pressures; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: F34 G12 G15 (search for similar items in EconPapers)
Date: 2014-07
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_968_14

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