In the wake of rising inflation in the aftermath of unprecedented debt financed stimulus packages, we ask: Can governments use real bonds (TIPS) as part of their debt portfolio to commit to stable inflation rates? We propose a novel framework of optimal debt management in the presence of sticky...

UK time-series data are used to document that the ratio of inflation-linked debt to total public debt (“linker share”) is procyclical. The business cycle properties of the linker share indicate a positive relationship with inflation, even after controlling for breakeven inflation. This can...

We show that GDP-linked bonds can provide diversification benefits to investors. We use a stochastic spanning methodology which makes no assumptions on the distri- butional characteristics of the returns of these novel instruments and test both floaters and linkers. None of these types of...

Although inflation-linked bonds have many advantages, nominal bonds are the most important instrument to finance public debts throughout the world. One explanation that the literature has offered is that nominal bonds make countercyclical monetary policies more effective. This paper reconsiders...

I consider a model of index-linked trading in which a fraction of investors trade an index product that holds the market portfolio (e.g., an ETF). The remaining investors build portfolios by evaluating stocks individually. Investors are equally informed and choose portfolios to maximize their...

Protecting against unexpected yield curve, inflation, and longevity shifts are some of the most critical issues institutional and private investors must solve when managing post-retirement income benefits. This paper empirically investigates the performance of alternative immunization strategies...

The Long Finance and London Accord community (over 48 financial institutions, thousands of people in finance and some 250 reports since 2005) has developed a simple, almost subversive, proposal for on climate change finance – index-linked carbon bonds. An indexlinked carbon bond is a...

The world's first known inflation-indexed bonds were issued by the Commonwealth of Massachusetts in 1780 during the Revolutionary War. These bonds were invented to deal with severe wartime inflation and with angry discontent among soldiers in the U.S. Army with the decline in purchasing power of...

This paper provides a toolkit for extracting accurate information about inflation expectations using inflation-linked bonds. First, we show how to estimate term structures of zero-coupon real rates and break-even inflation rates (BEIRs) in the euro area. This improves the analysis of...

Inflation-linked bond markets have experienced significant growth in recent years. This growth is somewhat surprising, for inflation-linked bonds cannot be considered a financial innovation and their development has taken place in a period of historically low global inflation and inflation...

We construct models for the pricing and risk management of inflation-linked derivatives. The models are rational in the sense that linear payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a...

We show that GDP-linked bonds can provide diversification benefits to investors. We use a stochastic spanning methodology which makes no assumptions on the distributional characteristics of the returns of these innovative instruments and apply to test both floaters and linkers. We find that both...

Why did the correlation between oil prices and 10-year TIPS Break-even Inflation, a measure of long-term inflation compensation, increase dramatically after the financial crisis? Using a shadow-rate no-arbitrage term structure model, we demonstrate that this is because when nominal interest...

Compared with stocks, bonds are more directly affected by fluctuations in oil prices through the expected inflation component in nominal bond yields. Surprisingly, prior literature finds little predictive power of oil price changes on bond excess returns. This finding is counter intuitive,...

We derive the price of inflation-indexed bonds of which the payments are linked to a lagged price index, and solve for the optimal bond portfolio under both inflation and indexation lags in closed form. We show that indexation lags increase the number of state variables characterizing both the...

Empirical research on the benefits of investing in inflation-linked bonds usually relies on a limited number of observations due to the relatively recent introduction of these assets. We estimate models for the break-even inflation rate and use these to create hypothetical inflation-linked bond...

Mispricing between Treasury inflation linked bond and nominal bonds is an issue under attention. This paper examines whether mispricing exists on the French bond market by constructing arbitrage strategies between these two types of assets. We consider self-financing portfolios hedged against...

We analyze the degree of anchoring of inflation expectations in the euro area during the post-crisis period, with a focus on the time span from 2014 onwards when long-term beliefs have substantially drifted away from the policy target. Using a new estimation technique, we look at tail...

If one believes in a more sustained economic recovery in the near term than the more volatile one we have been witnessing over the past few years, and hence the inherent risk of accelerating inflation, Treasury inflation-protected securities (TIPS) could provide inflation protection to...

Flekenstein, Longstaff and Lustig (2014) find mispricing between Treasury bonds and Treasury Inflation-Protected Securities (TIPS) in the United States, suggesting that Treasury bonds are expensive relative to TIPS. I examine the existence of a mispricing in the Israeli government bond market, a...

Order book and transactions data from the U.S. Treasury securities market are used to calculate daily measures of bid-ask spreads, depth, and price impact for a twenty-six-year sample period (1991-2017). From these measures, a daily index of Treasury market liquidity is constructed, reflecting...

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...

Selective default is an event in which a sovereign issuer chooses not to meet obligations on a class of bonds, while servicing her other debt. This paper presents unique empirical evidence of selective default risk premium in inflation-linked sovereign bond (ILB) yields of Germany, France and...

This paper addresses the valuation of contracts which exhibit inflation-linked delayed payments. The origin and magnitude of the convexity valuation difference obtained through stochastic and deterministic modelling is described and explained. Results from "Convexity adjustments in...

Using market prices of inflation-linked bonds and nominal bonds issued by the French Treasury, both the real and nominal zero coupon curves are estimated from January 1, 2013 to December 31, 2015. Several methods are applied to extract zero coupon bond prices: bootstrapping, a piecewise constant...