Inflation-Indexed Bonds and the Expectations Hypothesis / Carolin E. Pflueger, Luis M. Viceira.

Format:

Book

Author/Creator:

Pflueger, Carolin E.

Contributor:

National Bureau of Economic Research.

Viceira, Luis M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16903.

NBER working paper series no. w16903

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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 break-even 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:

Print version record

March 2011.