Treasury Bill Futures as Hedges Against Inflation Risk

40 Pages Posted: 19 Aug 2004 Last revised: 8 May 2021

See all articles by Jayendu Patel

Jayendu Patel

Harvard University

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: July 1987

Abstract

An important risk facing agents in a monetary economy arises from inflation uncertainty: in the U.S. for the 1953-84 period, unexpected quarterly inflation had a standard deviation of 2.1%. The costs of such uncertainty are likely to be even higher for multi-year contracts, since we estimate that a 1% unexpected inflation this year implies an upward revision of 0.43% for expected inflation for the forthcoming year and 1% for the years beyond that. The prospect of hedging inflation risk exposure using conventional financial instruments is bleak, as has been widely documented. We develop a theoretical case for Treasury bill futures as a inflation risk hedge by jointly assuming that (1) the Fisher Hypothesis applies to Treasury bill yields, (2) the Unbiased Expectations Hypothesis (UEH) applies to futures prices, and (3) inflation is an autoregressive process. Our empirical analysis shows that Treasury bill futures can reduce single-period inflation risk by about 30-40%. The expected cost of using such futures is close to zero, since we find that the Unbiased Expectations Hypothesis for Treasury bill futures cannot be rejected. Our results provide new indirect support for the Fisher Hypothesis.

Suggested Citation

Patel, Jayendu S. and Zeckhauser, Richard J., Treasury Bill Futures as Hedges Against Inflation Risk (July 1987). NBER Working Paper No. w2322, Available at SSRN: https://ssrn.com/abstract=349159

Jayendu S. Patel (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
46
Abstract Views
1,539
PlumX Metrics