Inflation-Indexed Bonds and the Expectations Hypothesis

Posted: 10 Jan 2012

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: December 2011

Abstract

This review empirically analyzes the expectations hypothesis (EH) in inflation-indexed (or real) bonds and in nominal bonds in the United States and in the United Kingdom. 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 breakeven inflation risk premium, also varies over time. We argue that the time variation in real bond risk premia most 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 (December 2011). Annual Review of Financial Economics, Vol. 3, pp. 139-158, 2011. Available at SSRN: https://ssrn.com/abstract=1981833 or http://dx.doi.org/10.1146/annurev-financial-102710-144843

Carolin E. Pflueger (Contact Author)

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

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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
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617-496-6592 (Fax)

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

National Bureau of Economic Research (NBER)

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