The Inflation Risk Premium: Evidence from the TIPS Market

Posted: 21 May 2019

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

Date Written: September 14, 2012

Abstract

This paper estimates the inflation risk premium using data on prices of Treasury inflation-protected securities (TIPS) over the period 2000-2008. The estimation approach used is arbitrage free, largely model free, and easy to implement. It also distinguishes between TIPS yields and real yields by explicitly taking into account the three-month indexation lag of TIPS in the analysis. In addition, we consider three measures of the TIPS liquidity, including a new measure based on TIPS prices only. We estimate the liquidity premium to be around 13 basis points over the full sample, but substantially higher in the first subperiod. We find that the inflation risk premium is time varying and, on average, is considerably lower than suggested by various structural models. Specifically, depending on the proxy used for expected inflation, the average 10-year inflation risk premium ranges from -9 to 4 basis points over the full sample and ranges between 1 and 6 basis points over the subperiod 2004-2008.

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

JEL Classification: E31, E43, E44

Suggested Citation

Grishchenko, Olesya V. and Huang, Jing-Zhi Jay, The Inflation Risk Premium: Evidence from the TIPS Market (September 14, 2012). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2147016 or http://dx.doi.org/10.2139/ssrn.2147016

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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