Tips from Tips: The Informational Content of Treasury Inflation-Protected Security Prices

Posted: 2 Jul 2021

See all articles by Stefania D'Amico

Stefania D'Amico

Federal Reserve Bank of Chicago

Don H. Kim

Board of Governors of the Federal Reserve System

Min Wei

Board of Governors of the Federal Reserve System

Multiple version iconThere are 6 versions of this paper

Date Written: 2008

Abstract

We examine the informational content of TIPS yields from the viewpoint of a general 3-factor no-arbitrage term structure model of inflation and interest rates. Our empirical results indicate that TIPS yields contained a \"liquidity premium\" that was until recently quite large (~ 1%). Key features of this premium are difficult to account for in a rational pricing framework, suggesting that TIPS may not have been priced efficiently in its early years. Besides the liquidity premium, a time-varying inflation risk premium complicates the interpretation of the TIPS breakeven inflation rate (the difference between the nominal and TIPS yields). Nonetheless, high-frequency variation in the TIPS breakeven rates is similar to the variation in inflation expectations implied by the model, lending support to the view that TIPS breakeven inflation rates are a useful proxy for inflation expectations.

Suggested Citation

D'Amico, Stefania and Kim, Don H. and Wei, Min, Tips from Tips: The Informational Content of Treasury Inflation-Protected Security Prices (2008). FEDS Working Paper No. 2008-30, Available at SSRN: https://ssrn.com/abstract=3877823

Stefania D'Amico (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Don H. Kim

Board of Governors of the Federal Reserve System ( email )

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

Min Wei

Board of Governors of the Federal Reserve System ( email )

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

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

Paper statistics

Abstract Views
19
PlumX Metrics