Tips and the VIX: Spillovers from Financial Panic to Breakeven Inflation in an Automated, Nonlinear Modeling Framework

18 Pages Posted: 26 Feb 2018

Date Written: April 2018

Abstract

This paper examines the determinants of the breakeven inflation rate (BEI) on U.S. Treasury Inflation Protected Securities. After controlling for several measures of liquidity, inflation expectations and inflation uncertainty; financial fear itself (proxied with the Volatility Index or VIX) remains a primary influence on BEI. To delve into the mechanism underlying this association, the VIX is decomposed, using intraday data, into conditional variance and the variance premium capturing risk aversion. Aside from the 2008 crisis, most of the effect emanated from the variance premium. Following the crisis, indicators of bank insolvency risk gain prominence as well. Lastly, an automated nonlinear model finds convex effects of variance, and diminishing returns to insolvency risk and liquidity.

Suggested Citation

Stillwagon, Josh R., Tips and the VIX: Spillovers from Financial Panic to Breakeven Inflation in an Automated, Nonlinear Modeling Framework (April 2018). Oxford Bulletin of Economics and Statistics, Vol. 80, Issue 2, pp. 218-235, 2018, Available at SSRN: https://ssrn.com/abstract=3129525 or http://dx.doi.org/10.1111/obes.12218

Josh R. Stillwagon (Contact Author)

Babson College - Economics Division ( email )

Babson Park, MA 02457
United States

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