Inflation-Indexed Bonds and the Expectations Hypothesis

32 Pages Posted: 28 Mar 2011

See all articles by Carolin E. Pflueger

Carolin E. Pflueger

University of British Columbia (UBC) - Division of Finance; 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

This paper empirically analyzes the Expectations Hypothesis (EH) in inflation-indexed (or real) bonds and in nominal bonds in the US and in the UK. We strongly reject the EH in inflation-indexed bonds, and also confirm and update the existing evidence rejecting the EH in nominal bonds. This rejection implies that the risk premium on both real and nominal bonds varies predictably over time. We also find strong evidence that the spread between the nominal and the real bond risk premium, or the break-even inflation risk premium, also varies over time. We argue that the time variation in real bond risk premia mostly likely reflects both a changing real interest rate risk premium and a changing liquidity risk premium, and that the variability in the nominal bond risk premia reflects a changing inflation risk premium. We estimate significant time series variability in the magnitude and sign of bond risk premia.

Suggested Citation

Pflueger, Carolin E. and Viceira, Luis M., Inflation-Indexed Bonds and the Expectations Hypothesis (March 2011). NBER Working Paper No. w16903. Available at SSRN: https://ssrn.com/abstract=1795852

Carolin E. Pflueger (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

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Vancouver, BC V6T 1Z2
Canada

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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United States

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