Inflation Risk Premium: Evidence from the TIPS Market

49 Pages Posted: 22 Mar 2012

See all articles by Olesya V. Grishchenko

Olesya V. Grishchenko

Board of Governors of the Federal Reserve System

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Multiple version iconThere are 4 versions of this paper

Date Written: December 9, 2011

Abstract

Inflation-indexed securities would appear to be the most direct source of information about inflation expectations and real interest rates" (Bernanke, 2004). In this paper we study the term structure of real interest rates, expected inflation and inflation risk premia using data on prices of Treasury Inflation Protected Securities (TIPS) over the period 2000-2008. The approach we use to estimate inflation risk premium is arbitrage free, largely model free, and easy to implement. We also make distinction between TIPS yields and real yields and take into account explicitly the three-month indexation lag of TIPS in the analysis. In addition, we propose a new liquidity measure based on TIPS prices. Accounting for it, we find that the inflation risk premium is time-varying: it is negative (positive) in the first (second) half of the sample period. The average 10-year inflation risk premium ranges from -16 to 10 basis points over the full sample depending on the proxy used for expected inflation. More specifically, the estimates of the 10-year inflation risk premium range between 14 and 19 basis points for 2004-2008 period.

Keywords: TIPS market, expected inflation, inflation risk premium, term structure of real rates, TIPS liquidity

JEL Classification: E31, E43, E44

Suggested Citation

Grishchenko, Olesya V. and Huang, Jing-Zhi Jay, Inflation Risk Premium: Evidence from the TIPS Market (December 9, 2011). FEDS Working Paper No. 2012-06. Available at SSRN: https://ssrn.com/abstract=2027101 or http://dx.doi.org/10.2139/ssrn.2027101

Olesya V. Grishchenko (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2981 (Phone)

Jing-Zhi Jay Huang

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

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