Treasury Bill Futures as Hedges Against Inflation Risk

Jayendu Patel and Richard Zeckhauser

No 2322, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: An important risk facing agents in a monetary economy arises from inflation uncertainty: in the U.S. for the 1953-84 period, unexpected quarterly inflation had a standard deviation of 2.1%. The costs of such uncertainty are likely to be even higher for multi-year contracts, since we estimate that a 1% unexpected inflation this year implies an upward revision of 0.43% for expected inflation for the forthcoming year and 1% for the years beyond that. The prospect of hedging inflation risk exposure using conventional financial instruments is bleak, as has been widely documented. We develop a theoretical case for Treasury bill futures as a inflation risk hedge by jointly assuming that (1) the Fisher Hypothesis applies to Treasury bill yields, (2) the Unbiased Expectations Hypothesis (UEH) applies to futures prices, and (3) inflation is an autoregressive process. Our empirical analysis shows that Treasury bill futures can reduce single-period inflation risk by about 30-40%. The expected cost of using such futures is close to zero, since we find that the Unbiased Expectations Hypothesis for Treasury bill futures cannot be rejected. Our results provide new indirect support for the Fisher Hypothesis.

Date: 1987-07
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as "Treasury Bill Futures as Unbiased Predictors: New Evidence and Relation to Unexpected Inflation," Review of Futures Markets, vol 8, no 3, 1989, pp 35 2-368

Downloads: (external link)
http://www.nber.org/papers/w2322.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:2322

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w2322

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().