Tips from TIPS
Subtitle: the informational content of Treasury Inflation-Protected Security prices
By: by Stefania D'Amico, Don H. Kim and Min Wei.
Contributors: Kim, Don H.; Wei, Min, 1975-; Bank for International Settlements. Monetary and Economic Dept.
Series: BIS working papers -- no. 248
Publisher: Bank for International Settlements
Published: 2008
Place of publication: Basel, Switzerland
Language: eng
Format: Electronic resource
Description: 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.
Notes: Title from PDF file (viewed on Oct. 10, 2008).

"February 2008."

"Monetary and Economic Department."

Includes bibliographical references.

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