The Ex Ante Real Rate and Inflation Premium Under a Habit Consumption Model

47 Pages Posted: 18 Sep 2003

See all articles by Leonardo Madureira

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management

Abstract

This paper analyzes and quantifies ex ante components of bond yields - real rate of returns and risk premia - from observed prices of nominal and indexed bonds in the United Kingdom from 1983 to 2000. The estimation uses an asset pricing framework based on a habit consumption model together with a joint formulation of consumption growth and inflation. Nominal yields carry a time-varying inflation premium that is significant throughout the period, increasing in the bond's maturity and contributing up to 25 basis points to yearly nominal yields. The analysis allows the extraction of the ex ante real rate from indexed bonds by properly taking into account both the incomplete indexation on these instruments and the inflation premium embedded in the nominal bonds.

JEL Classification: E21, E27, E31, E43, G12

Suggested Citation

Madureira, Leonardo, The Ex Ante Real Rate and Inflation Premium Under a Habit Consumption Model. Journal of Empirical Finance, Vol. 14, No. 3, pp. 355-388, 2007, Available at SSRN: https://ssrn.com/abstract=438000 or http://dx.doi.org/10.2139/ssrn.438000

Leonardo Madureira (Contact Author)

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HOME PAGE: http://faculty.weatherhead.case.edu/madureira/

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