Pricing TIPS and Treasuries with Linear Regressions

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe present an affi ne term structure model for the joint pricing of Treasury Infl ation-Protected Securities (TIPS) and Treasury yield curves that adjusts for TIPS' relative illiquidity. Our estimation using linear regressions is computationally very fast and can accommodate unspanned factors. The baseline specifi cation with six principal components extracted from Treasury and TIPS yields, in combination with a liquidity factor, generates negligibly small pricing errors for both real and nominal yields. Model-implied expected infl ation provides a better prediction of actual infl ation than breakeven infl ation. The value of the defl ation fl oor calculated from the model is generally small in magnitude, but spiked during the recent crisis.

TIPS Liquidity Premium and Quantitative Easing

“…This identifying assumption allows us to obtain a model-free measure of the liquidity premium in the TIPS market. The literature so far has not used this approach since in existing studies liquidity premia in TIPS are either computed using replicating portfolios (see Fleckenstein et al (2014) and Christensen and Gillan (2013)), observable liquidity proxies (see Abrahams, Adrian, Crump and Moench (2013) and Pflueger and Viceira (2011)) or latent factors in the context of affine term structure models (see D'Amico et al (2014)). Joint factor models for nominal and real yields that do not include a liquidity premium component have been proposed by Christensen, Lopez and Rudebusch (2010), Joyce, Lildholdt and Sorensen (2010) and Haubrich, Pennacchi and Ritchken (2012).…”

Tips from TIPS: The Informational Content of Treasury Inflation-Protected Security Prices

“…Given the unobserved nature of the TIPS-specific factor in our model, one may question whether it is indeed capturing TIPS liquidity rather than other components of TIPS yields that are 29 As can be seen from Table 3, its risk-neutral persistence,κ * =κ +σλ 1 , is estimated to be very small at around 0.1 in all models and is tightly estimated, with a standard error of about 0.006. 30 These estimates are somewhat larger than those in Pflueger and Viceira (2013) but broadly in line with those in Abrahams et al (2013).…”

“…5 This paper and a contemporaneous study by Chen et al (2010) are the first two to study TIPS in a no-arbitrage framework. More recent papers analyzing TIPS or inflation swaps include , Adrian and Wu (2008), Haubrich, Pennacchi, and Ritchken (2012), Christensen, Lopez, and Rudebusch (2010), Pflueger and Viceira (2013), , Christensen and Gillan (2012), Fleming and Krishnan (2012), Grishchenko and Huang (2013), Abrahams, Adrian, Crump, and Moench (2013). 6 For studies not using indexed bonds, see, among others, Pennacchi (1991), Foresi, Penati, and Pennacchi (1997), and Brennan, Wang, and Xia (2004), Buraschi and Jiltsov (2005), and .…”

Real and Nominal Equilibrium Yield Curves: Wage Rigidities and Permanent Shocks

“…8 There is an extensive empirical literature on the real term and inflation risk premia with and without inflation-linked bonds using no-arbitrage term structure models. This literature shows a wide range for the sign and size of inflation risk premia in the U.K. and in the U.S. An incomplete list includes Barr and Campbell (1997) Evans (1998), and Joyce, Lildholdt and Sorensen (2010) for the U.K., and Ang, Bekaert and Wei (2008), D'Amico, Kim and Wei (2014), Chen, Liu and Cheng (2010), Christensen, Lopez and Rudebusch (2010), Chernov and Mueller (2012), Grishchenko and Huang (2013), and Abrahams et al (2013) for the U.S. Hördahl and Tristani (2012) provide a similar study for the eurozone.…”