Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity

Carolin Pflueger and Luis Viceira ()

No 11-094, Harvard Business School Working Papers from Harvard Business School

Abstract: Estimating the liquidity differential between inflation-indexed and nominal bond yields, we separately test for time-varying real rate risk premia, inflation risk premia, and liquidity premia in U.S. and U.K. bond markets. We find strong, model independent evidence that real rate risk premia and inflation risk premia contribute to nominal bond excess return predictability to quantitatively similar degrees. The estimated liquidity premium between U.S. inflation-indexed and nominal yields is systematic, ranges from 30 bps in 2005 to over 150 bps during 2008-2009, and contributes to return predictability in inflation-indexed bonds. We find no evidence that bond supply shocks generate return predictability.

Keywords: Term structure; Real interest rate risk; Inflation risk; Inflation-indexed bonds (search for similar items in EconPapers)
JEL-codes: G2 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2011-03, Revised 2013-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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http://www.hbs.edu/faculty/pages/download.aspx?name=11-094.pdf Revised version, 2013 (application/pdf)

Related works:
Working Paper: Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hbs:wpaper:11-094

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