The Informational Content of the Embedded Deflation Option in TIPS

80 Pages Posted: 16 Sep 2012 Last revised: 23 Dec 2015

See all articles by Olesya V. Grishchenko

Olesya V. Grishchenko

Board of Governors of the Federal Reserve System

Joel M. Vanden

Pennsylvania State University - Smeal College of Business

Jianing Zhang

Pennsylvania State University - Smeal College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 23, 2015

Abstract

We estimate the value of the embedded option in the U.S. Treasury Inflation Protected Securities (TIPS). The embedded option value exhibits time variation that is correlated with periods of deflationary expectations. We construct embedded option explanatory variables that are statistically and economically significant for explaining future inflation, even in the presence of traditional inflation variables such as lagged inflation, the gold return, the crude oil return, the VIX return, liquidity, surveys, and the yield spread between nominal Treasuries and TIPS. After conducting robustness tests, we conclude that the TIPS embedded option contains useful information for future inflation.

Keywords: TIPS, embedded option, inflation, deflation, term structure

JEL Classification: E31, G12, E43, E44

Suggested Citation

Grishchenko, Olesya V. and Vanden, Joel M. and Zhang, Jianing, The Informational Content of the Embedded Deflation Option in TIPS (October 23, 2015). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2147005 or http://dx.doi.org/10.2139/ssrn.2147005

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)

Joel M. Vanden

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

Jianing Zhang

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

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