Pricing deflation risk with U.S. Treasury yields

Jens Christensen, Jose Lopez and Glenn Rudebusch

No 2012-07, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We use an arbitrage-free term structure model with spanned stochastic volatility to determine the value of the deflation protection option embedded in Treasury inflation-protected securities (TIPS). The model accurately prices the deflation protection option prior to the financial crisis when its value was near zero; at the peak of the crisis in late 2008 when deflationary concerns spiked sharply; and in the post-crisis period. During 2009, the average value of this option at the five-year maturity was 41 basis points on a par-yield basis.

Keywords: Deflation (Finance); Inflation-indexed bonds - United States (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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Journal Article: Pricing Deflation Risk with US Treasury Yields (2016)
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