Inflation-indexed bonds and the expectations hypothesis
By: Carolin E. Pflueger, Luis M. Viceira
Contributors: Viceira, Luis M.; Harvard Business School
Series: Working paper / Harvard Business School -- 11-095; Working paper (Harvard Business School) -- 11-095.
Publisher: Harvard Business School
Published: 2011
Place of publication: [Boston]
Language: eng
Number of pages: 22
Description: This paper empirically analyzes the Expectations Hypothesis (EH) in inflation-indexed (or real) bonds and in nominal bonds in the US and in the UK. We strongly reject the EH in inflation-indexed bonds, and also confirm and update the existing evidence rejecting the EH in nominal bonds. This rejection implies that the risk premium on both real and nominal bonds varies predictably over time. We also find strong evidence that the spread between the nominal and the real bond risk premium, or the breakeven inflation risk premium, also varies over time. We argue that the time variation in real bond risk premia mostly likely reflects both a changing real interest rate risk premium and a changing liquidity risk premium, and that the variability in the nominal bond risk premia reflects a changing inflation risk premium. We estimate significant time series variability in the magnitude and sign of bond risk premia.
Notes: "March 2011"--Publisher's website.

Includes bibliographical references.