TIPS, Inflation Expectations and the Financial Crisis

Thorsten Lehnert, Aleksandar Andonov and Florian Bardong ()
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Aleksandar Andonov: Limburg Institute of Financial Economics, Maastricht University
Florian Bardong: Fixed Income Research, Barclays Global Investors, London

LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg

Abstract: Previous research indicates that the US market for inflation-linked bonds is not efficient and that market inefficiencies can be exploited by informed traders who include survey estimations or inflation model forecasts in trades on break-even inflation. Results from this extended research over a time-period in which the TIPS market matured and increased in depth, while the volatility of real yields and inflation increased, confirm that TIPS market inefficiency was not temporary but persisted over the entire time period between 1997 and 2009. Using estimations generated by the Survey of Professional Forecasters or forecasts based on the Kothari and Shanken (2004) inflation model to construct a break-even trading strategy leads to excess returns over a static buy-and-hold strategy. These excess returns remain substantial even after accounting for trading costs. Furthermore, TIPS returns still include a substantial liquidity premium, which increased during the financial crisis.

Keywords: TIPS; market; inflation expectations; survey of Professional Forecasters; financial crisis (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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