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

50 Pages Posted: 21 Mar 2011

See all articles by Carolin E. Pflueger

Carolin E. Pflueger

University of Chicago - Harris School of Public Policy; National Bureau of Economic Research (NBER)

Luis M. Viceira

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2011

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.

Suggested Citation

Pflueger, Carolin E. and Viceira, Luis M., Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity (March 2011). NBER Working Paper No. w16892. Available at SSRN: https://ssrn.com/abstract=1789473

Carolin E. Pflueger (Contact Author)

University of Chicago - Harris School of Public Policy ( email )

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Chicago, IL 60637
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National Bureau of Economic Research (NBER) ( email )

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Luis M. Viceira

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6331 (Phone)
617-496-6592 (Fax)

HOME PAGE: http://www.people.hbs.edu/lviceira

National Bureau of Economic Research (NBER)

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