No-Arbitrage Pricing of GDP-Linked Bonds

36 Pages Posted: 17 Jan 2020

See all articles by Fernando Eguren Martin

Fernando Eguren Martin

Bank of England

Andrew Meldrum

Board of Governors of the Federal Reserve System

Wen Yan

Barclays Capital

Date Written: January 10, 2020


We use a no-arbitrage term structure model of equity yields computed from the prices of dividend swaps to estimate the yields on hypothetical bonds with cash-flows indexed to the level of US GDP. This provides a novel approach for estimating the possible relative cost of conventional and GDP-linked bonds, which is likely to be of interest to sovereigns considering the case for issuing GDP-linked debt. Our model predicts that US GDP-linked bonds would typically have yields lower than those on conventional Treasury bonds with the same maturity in our sample from 2010 to 2017. Positive expected future GDP growth lowers the yield on GDP-linked bonds relative to conventional bonds, which typically more than offsets the estimated GDP risk premium demanded by investors for holding GDP risk. These risk premia decrease with maturity,with unconditional averages falling in absolute value from 7 percentage points at the short-end of the curve to 1 percentage points at the 10-year horizon.

Keywords: affine term structure model (ATSM), bond yield, equity yield, risk premia, dividend swaps, GDP-linked bonds, spanned macroeconomic factors

JEL Classification: G01, E43, H63

Suggested Citation

Eguren Martin, Fernando and Meldrum, Andrew and Yan, Wen, No-Arbitrage Pricing of GDP-Linked Bonds (January 10, 2020). Bank of England Working Paper No. 849, January 2020, Available at SSRN: or

Fernando Eguren Martin (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Andrew Meldrum

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Wen Yan

Barclays Capital ( email )


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

Paper statistics

Abstract Views
PlumX Metrics