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The missing piece of the puzzle : liquidity premiums in inflation-indexed markets

  • 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.

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Author:Joost Driessen, Theodore E. Nijman, Zorka SimonORCiD
URN:urn:nbn:de:hebis:30:3-438750
URL:https://ssrn.com/abstract=3042506
Parent Title (English):SAFE working paper series ; No. 183
Series (Serial Number):SAFE working paper (183)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2017
Year of first Publication:2017
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2017/10/17
Tag:Liquidity premium; TIPS; TIPS–Treasury puzzle; inflation swaps; liquidity risk
Issue:September 25, 2017
Page Number:52
HeBIS-PPN:419185496
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C5 Econometric Modeling / C51 Model Construction and Estimation
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht