Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices

Stefania D'Amico, Don H. Kim and Min Wei
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Don H. Kim: https://www.federalreserve.gov/econres/don-h-kim.htm

No 2010-19, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: TIPS breakeven inflation rate, defined as the difference between nominal and TIPS yields of comparable maturities, is potentially useful as a real-time measure of market inflation expectations. In this paper, we provide evidence that a fairly large TIPS liquidity premium existed until recently, using a multifactor no-arbitrage term structure model estimated with nominal and TIPS yields, inflation and survey forecasts of interest rates. Ignoring the TIPS liquidity premiums leads to counterintuitive implications for inflation expectations and inflation risk premium, and produces large pricing errors for TIPS. In contrast, models incorporating a TIPS liquidity factor generate much better fit for these variables and reveal a TIPS liquidity premium that was until recently quite large (~1%) but has come down in recent years, consistent with the common perception that TIPS market grew and liquidity conditions improved. Our results indicate that after taking proper account of the liquidity conditions in the TIPS market, the movement in TIPS breakeven inflation rate can provide useful information for identifying real yields, expected inflation and inflation risk premium.

Keywords: Liquidity (Economics); Inflation (Finance) (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices (2018)
Working Paper: Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices (2014)
Working Paper: Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices (2008)
Working Paper: Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices (2008)
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