No-arbitrage pricing of GDP-linked bonds
Fernando Eguren-Martin (),
Andrew Meldrum () and
Additional contact information
Fernando Eguren-Martin: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Andrew Meldrum: Federal Reserve Board
Authors registered in the RePEc Author Service: Fernando Eguren Martin
No 849, Bank of England working papers from Bank of England
We use a no-arbitrage term structure model of equity yields computed from the prices of dividend swaps to estimate the yields on hypothetical bonds with cash-flows indexed to the level of US GDP. This provides a novel approach for estimating the possible relative cost of conventional and GDP-linked bonds, which is likely to be of interest to sovereigns considering the case for issuing GDP-linked debt. Our model predicts that US GDP-linked bonds would typically have yields lower than those on conventional Treasury bonds with the same maturity in our sample from 2010 to 2017. Positive expected future GDP growth lowers the yield on GDP-linked bonds relative to conventional bonds, which typically more than offsets the estimated GDP risk premium demanded by investors for holding GDP risk. These risk premia decrease with maturity,with unconditional averages falling in absolute value from 7 percentage points at the short-end of the curve to 1 percentage points at the 10-year horizon.
Keywords: Affine term structure model (ATSM); bond yield; equity yield; risk premia; dividend swaps; GDP-linked bonds; spanned macroeconomic factors. (search for similar items in EconPapers)
JEL-codes: E43 G01 H63 (search for similar items in EconPapers)
Pages: 36 pages
New Economics Papers: this item is included in nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... gdp-linked-bonds.pdf Full text (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0849
Access Statistics for this paper
More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().