Refine
Year of publication
- 2017 (1)
Document Type
- Working Paper (1) (remove)
Language
- English (1)
Has Fulltext
- yes (1)
Is part of the Bibliography
- no (1)
Keywords
- inflation swaps (1) (remove)
Fleckenstein et al. (2014) document that nominal Treasuries trade at higher prices than inflation-swapped indexed bonds, which exactly replicate the nominal cash flows. We study whether this mispricing arises from liquidity premiums in inflation-indexed bonds (TIPS) and inflation swaps. Using US data, we show that the level of liquidity affects TIPS, whereas swap yields include a liquidity risk premium. We also allow for liquidity effects in nominal bonds. These results are based on a model with a systematic liquidity risk factor and asset-specific liquidity characteristics. We show that these liquidity (risk) premiums explain a substantial part of the TIPS underpricing.