Are Tips the 'Real' Deal?: A Conditional Assessment of Their Role in a Nominal Portfolio

43 Pages Posted: 11 Nov 2002

See all articles by David P. Simon

David P. Simon

Bentley University - Department of Finance

Delroy M. Hunter

University of South Florida

Date Written: October 7, 2002

Abstract

This paper documents predictable time-variation in the real return beta of U.S. Treasury inflation protected securities (TIPS) and in the Sharpe ratios of both indexed and conventional bonds. The conditional mean and volatility of both bonds and their conditional correlation are first estimated from predetermined variables. These estimates are then used to compute conditional real return betas and Sharpe ratios. The time-variation in real return betas and the correlation between TIPS and nominal bonds coincides with major developments in the fixed income market. One implication of this predictability is that portfolio managers can assess more efficiently the risk of investing in TIPS versus conventional bonds. Conditional Sharpe ratios indicate that over the sample period, TIPS had superior volatility-adjusted returns relative to nominal bonds. This finding is striking in view of the absence of a major inflation scare during the sample period from February 1997 through August 2001, but is loosely consistent with the possibility that TIPS elevated rather than reduced Treasury borrowing costs. On the other hand, mean-variance spanning tests indicate that TIPS did not enhance the mean-variance efficiency of diversified portfolios.

JEL Classification: G11, G12, G18

Suggested Citation

Simon, David P. and Hunter, Delroy M., Are Tips the 'Real' Deal?: A Conditional Assessment of Their Role in a Nominal Portfolio (October 7, 2002). EFMA 2003 Helsinki Meetings. Available at SSRN: https://ssrn.com/abstract=338580 or http://dx.doi.org/10.2139/ssrn.338580

David P. Simon (Contact Author)

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States
781-891-2489 (Phone)
781-891-2896 (Fax)

Delroy M. Hunter

University of South Florida ( email )

Dept of Finance, Muma College of Business
4202 E. Fowler Ave, BSN3403
Tampa, FL 33620
United States
(813) 843-2085 (Phone)
(813) 974-3084 (Fax)

HOME PAGE: http://www.usf.edu/business/contacts/hunter-delroy.aspx

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