Information Contents of Inflation Indexed Bond Prices
Information Contents of Inflation Indexed Bond Prices

Author: Yukinobu Kitamura

Publisher:

Published: 2004

Total Pages: 50

ISBN-13:

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In January 1997, the U.S. Treasury started issuing Treasury Inflation-Protection Securities (TIPS; hereafter TIPS and indexed bonds interchangeably) and, as of September 2002, a total of ten issues were being traded on the market, while one issue had already matured. The purpose of this paper is to attempt an evaluation of indexed bonds based on the record of five and a half years of market trading in TIPS, and to present the results as a reference for the issue of similar securities by the Japanese government in the future. The results of this paper are as follows: (1) Real interest rates are relatively stable and remain near the 4% mark. The 30 year bond is even more stable. (2) The expected inflation rate is more closely linked to realized CPI than to the real yield. However, the expected inflation rate is far more stable and its fluctuations smaller. In particular, the 30 year bond is steady, near the 2% mark. (3) While the economic information derived from the 10 year bond is strongly influenced by short-term economic fluctuations, the economic information derived from the 30 year bond is generally unresponsive to short-term economic fluctuations. (4) Examination of the derived information using econometric methods indicates that useful economic information was obtained from the following indexed bonds in the secondary markets: Series Three and Four 10 year bonds. Information included in the expected inflation rate was useful for the Series Three and Four 10 year bonds. Hence, while a total of eleven indexed bonds have been issued, very few of them have proven to be truly useful. These useful bonds turn out to have fair initial conditions, continuous arbitrages with the nominal bonds, and active trades in the secondary markets.

Inflation-indexed Securities
Inflation-indexed Securities

Author: Mark Deacon

Publisher: Prentice Hall PTR

Published: 1998

Total Pages: 258

ISBN-13:

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The entry of the USA into the index-linked bond market has heightened the demand for more complex information about these instruments. This text aims to help the readers understand securities, the motivation of both issuers and of investors, and how their value compares to one another.

The Rationale and Design of Inflation-Indexed Bonds
The Rationale and Design of Inflation-Indexed Bonds

Author: Mr.Robert T. Price

Publisher: International Monetary Fund

Published: 1997-01-01

Total Pages: 70

ISBN-13: 1451842864

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A number of industrialized countries have recently offered inflation-indexed bonds. Some members of another group of countries that had earlier adopted more comprehensive indexation in response to high inflation have taken steps to reduce the scope of indexation in their economies. This paper surveys debt management, monetary policy, and welfare arguments on the use of inflation-indexed bonds, and relates these to the experiences of various issuers. The paper also considers some important design features of indexed bonds.

Handbook of Inflation Indexed Bonds
Handbook of Inflation Indexed Bonds

Author: John Brynjolfsson

Publisher: John Wiley & Sons

Published: 1999-02-15

Total Pages: 314

ISBN-13: 9781883249489

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Handbook of Inflation Indexed Bonds provides complete coverage of inflation protection bonds beginning with their first U.S. issuance in 1997. Five, in-depth sections detail: strategic asset allocation; mechanics, valuation, and risk monitoring; global environment; issuers; and investors.

Inflation-indexed Securities
Inflation-indexed Securities

Author: Mark Deacon

Publisher: John Wiley & Sons

Published: 2004-04-21

Total Pages: 360

ISBN-13: 0470868988

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The global market for inflation-indexed securities has ballooned in recent years, and this trend is set to continue. This book examines the rationale behind issuance and investment decisions, and details the issues facing anyone who designs indexed securities, illustrating them wherever possible with actual examples from the international capital markets. In particular, an extensive review of indexed debt markets throughout the world is provided - including for the first time, a comprehensive and consistent set of cash flow and price-yield equations for the instruments already in existence in the major bond markets - forming an important reference for those already experienced in the field, as well as practitioners and academics approaching the subject for the first time. The book also provides unique insight into the development of inflation-indexed derivative products, and the analytical tools required to value such instruments.

Tips from TIPS
Tips from TIPS

Author: Stefania D'Amico

Publisher:

Published: 2008

Total Pages: 56

ISBN-13:

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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.

Inflation Expectations
Inflation Expectations

Author: Peter J. N. Sinclair

Publisher: Routledge

Published: 2009-12-16

Total Pages: 402

ISBN-13: 1135179778

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Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.

Strategic Asset Allocation
Strategic Asset Allocation

Author: John Y. Campbell

Publisher: OUP Oxford

Published: 2002-01-03

Total Pages: 272

ISBN-13: 019160691X

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Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.