Inflation‐Adjusted Bonds and the Inflation Risk Premium

Fleckenstein, Matthias; Longstaff, Francis A.; Lustig, Hanno

doi:10.1002/9781118709207.ch3

Handbook of Fixed‐Income Securities 2016

DOI: 10.1002/9781118709207.ch3

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Inflation‐Adjusted Bonds and the Inflation Risk Premium

Matthias Fleckenstein¹,

Francis A. Longstaff

Hanno Lustig

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Bond Market Exposures to Macroeconomic and Monetary Policy Risks

Song

2014

SSRN Journal

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I provide empirical evidence of changes in the U.S. Treasury yield curve and related macroeconomic factors, and investigate whether the changes are brought about by external shocks, monetary policy, or by both. To explore this, I characterize bond market exposures to macroeconomic and monetary policy risks, using an equilibrium term structure model with recursive preferences in which inflation dynamics are endogenously determined. In my model, the key risks that affect bond market prices are changes in the correlation between growth and inflation and changes in the conduct of monetary policy.Using a novel estimation technique, I find that the changes in monetary policy affect the level of bond yields through their effect on expected inflation, while the changes in the correlation between growth and inflation affect both the level as well as the volatility of bond yields. Consequently, the changes in the correlation structure are the main contributor to bond risk premia and to bond market volatility.The time variations within a regime and risks associated with moving across regimes lead to the failure of the Expectations Hypothesis and to the excess bond return predictability regression of Cochrane and Piazzesi (2005), as in the data.

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Bond Market Exposures to Macroeconomic and Monetary Policy Risks

Song

2014

SSRN Journal

View full text Add to dashboard Cite

show abstract

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Inflation‐Adjusted Bonds and the Inflation Risk Premium

Cited by 1 publication

References 26 publications

Bond Market Exposures to Macroeconomic and Monetary Policy Risks

Bond Market Exposures to Macroeconomic and Monetary Policy Risks

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