Diversification Benefits of Treasury Inflation Protected Securities: An Empirical Puzzle

25 Pages Posted: 27 Feb 2006  

Abdullah Mamun

University of Saskatchewan - Department of Finance and Management Science

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Date Written: February 15, 2006

Abstract

This paper empirically tests the benefits of Treasury inflation protected securities (TIPS) for investors. This study examines whether TIPS enhance the risk return characteristics of an investor's portfolio. The results of conditional spanning tests show that adding TIPS to any combined portfolio of stocks, Treasury bonds, Treasury bills, corporate bonds, and real estate provides investors with diversification benefits. This paper also shows that United Kingdom (UK) inflation-linked gilts (ILGs) enhance the risk return characteristics of an investor's portfolio. These findings hold in different economic and inflationary environments, and they confirm the prediction of economic theory that indexed bonds are important for investors who are vulnerable to inflation.

Keywords: Treasury inflation protected securities (TIPS), portfolio diversification

JEL Classification: G11, G12

Suggested Citation

Mamun, Abdullah and Visaltanachoti, Nuttawat, Diversification Benefits of Treasury Inflation Protected Securities: An Empirical Puzzle (February 15, 2006). Available at SSRN: https://ssrn.com/abstract=885062 or http://dx.doi.org/10.2139/ssrn.885062

Abdullah Mamun

University of Saskatchewan - Department of Finance and Management Science ( email )

College of Commerce
Saskatoon, Saskatchewan S7N 5A7
Canada
306 966 1862 (Phone)
306 966 2515 (Fax)

HOME PAGE: http://www.commerce.usask.ca/faculty/mamun/

Nuttawat Visaltanachoti (Contact Author)

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

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