The TIPS Liquidity Premium

Martin M. Andreasen, Jens Christensen and Simon Riddell

No 2017-11, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We introduce an arbitrage-free term structure model of nominal and real yields that accounts for liquidity risk in Treasury inflation-protected securities (TIPS). The novel feature of our model is to identify liquidity risk from individual TIPS prices by accounting for the tendency that TIPS, like most fixed-income securities, go into buy-and-hold investors’ portfolios as time passes. We find a sizable and countercyclical TIPS liquidity premium, which helps our model to match TIPS prices. Accounting for liquidity risk also improves the model’s ability to forecast inflation and match surveys of inflation expectations, although these series are not included in the estimation.

JEL-codes: E43 E47 G12 G13 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2020-07-09
New Economics Papers: this item is included in nep-dcm
Note: The first version of this paper was published May 19, 2017.
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2017-11

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DOI: 10.24148/wp2017-11

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