Empirical Tips

Posted: 13 Feb 2004

See all articles by Richard Roll

Richard Roll

California Institute of Technology

Abstract

U.S. Treasury Inflation-Indexed Securities (commonly known as TIPS) were first issued in January 1997. Through the third quarter of 2003, 12 TIPS had been issued, with original maturities ranging from 5 to 30 years. One TIP bond has already matured. This study documents the correlations of TIPS returns with the returns on nominal bonds and with equity returns over the past seven years; TIPS real and effective nominal durations; and changes in the volatility of TIPS over time. TIPS are used here to estimate real yield curves, which are then compared against nominal yield curves to derive the term structure of anticipated inflation on a daily basis. An explanation offered for the dramatic decline in TIPS real yields since 1999 is supported by empirical tests. Finally, given plausible assumptions about future expected returns, the article shows that an investment portfolio diversified between U.S. equities and nominal bonds would be improved by the addition of TIPS.

Keywords: Portfolio management: asset allocation; debt Investments: return or yield measures; debt Investments: other; economics: other

Suggested Citation

Roll, Richard W., Empirical Tips. Financial Analysts Journal, Vol. 60, No. 1, pp. 31-53, January/February 2004. Available at SSRN: https://ssrn.com/abstract=500004

Richard W. Roll (Contact Author)

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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