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Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices

Stefania D'Amico, Don H Kim and Min Wei

No 248, BIS Working Papers from Bank for International Settlements

Abstract: We examine the informational content of TIPS yields from the viewpoint of a general 3-factor no-arbitrage term structure model of inflation and interest rates. Our empirical results indicate that TIPS yields contained a "liquidity premium" that was until recently quite large (~1%). Key features of this premium are difficult to account for in a rational pricing framework, suggesting that TIPS may not have been priced efficiently in its early years. Besides the liquidity premium, a time-varying inflation risk premium complicates the interpretation of the TIPS breakeven inflation rate (the difference between the nominal and TIPS yields). Nonetheless, high-frequency variation in the TIPS breakeven rates is similar to the variation in inflation expectations implied by the model, lending support to the view that TIPS breakeven inflation rates are a useful proxy for inflation expectations.

Keywords: term structure model; inflation expectation; inflation risk premium; SPF; Treasury Inflation-Protected Securities (TIPS) (search for similar items in EconPapers)
Pages: 48 pages
Date: 2008-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (27) Track citations by RSS feed

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Related works:
Journal Article: Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices (2018) Downloads
Working Paper: Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices (2016) Downloads
Working Paper: Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices (2010) Downloads
Working Paper: Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices (2008) Downloads
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