Inflation Expectations, Liquidity Premia and Global Spillovers in Japanese Bond Markets

Jens Christensen and Mark Spiegel

No 2024-12, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Using a novel arbitrage-free dynamic term structure model of nominal and real yields, we account for liquidity premia and the deflation protection afforded by Japanese inflation-indexed bonds, known as JGBi’s. Adjusting for time-varying JGBi liquidity premia lowers the estimated value of JGBi deflation protection and raises inflation risk premium estimates, while long-term Japanese inflation expectations remain relatively stable at levels modestly exceeding one percent during the pandemic period. We then utilize our estimated liquidity measure to document statistically significant spillovers to JGBi market liquidity from global bond market illiquidity, as proxied by periods of low U.S. Treasury market depth.

Keywords: affine arbitrage-free term structure model; deflation risk; deflation protection; Liquidity Spillovers (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 G12 G17 (search for similar items in EconPapers)
Pages: 43
Date: 2024-07-12
New Economics Papers: this item is included in nep-ban, nep-ifn and nep-mon
Note: Original publication date: 2024-04-11.
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Citations: View citations in EconPapers (1)

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DOI: 10.24148/wp2024-12

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