Estimating the Cost of U.S. Indexed Bonds

29 Pages Posted: 17 Jan 2015

See all articles by Silverio Foresi

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

Alessandro Penati

Catholic University of the Sacred Heart of Milan

George Pennacchi

University of Illinois

Date Written: January 7, 1997

Abstract

This paper presents an equilibrium bond pricing model driven by two stochastic factors: the real interest rate and the expected rate of inflation. The model’s parameters are estimated using a maximum likelihood technique based on a Kalman filter. Data on nominal U.S. Treasury securities and Survey of Professional Forecasters predictions of the GDP deflator are employed to identify the separate effects of real and nominal variables. The market prices of real interest rate risk and inflation risk are estimated, which allows us to construct yield curves for nominal and indexed U.S. Treasury securities. The relative costs of nominal and indexed bonds can then be assessed.

Suggested Citation

Foresi, Silverio and Penati, Alessandro and Pennacchi, George G., Estimating the Cost of U.S. Indexed Bonds (January 7, 1997). FRB of Cleveland Working Paper No. 9701, Available at SSRN: https://ssrn.com/abstract=2550328 or http://dx.doi.org/10.2139/ssrn.2550328

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group ( email )

32 Old Slip, 24th Floor
New York, NY 10005
United States
(212) 357-3508 (Phone)

Alessandro Penati

Catholic University of the Sacred Heart of Milan ( email )

Istituto di Economia Aziendale Via Necchi, 5
20123 Milano
Italy
+39 02 76232421 (Phone)
+39 02 76232420 (Fax)

George G. Pennacchi (Contact Author)

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

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