Pricing the Term Structure of Inflation Risk Premia: Theory and Evidence from TIPS
In this paper, we study inflation risk and the term structure of inflation risk premia in the U.S. nominal interest rates through the Treasury Inflation Protection Securities (TIPS) by using a modified quadratic model with correlated real rate and inflation. The closed form model we derive in this paper does not require solving any ordinary differential equation, which drastically facilitates the estimation of the model parameters and improves the accuracy of the valuation of nominal rates and TIPS, and especially enables us to estimate the term structure of inflation risk premia. We use the two-factor model to evaluate the inflation-index bonds and study the relationship between the real rate and the expected inflation rate implied by the nominal Constant Maturity Treasury (CMT) rates for the period of January 1998 through December 2004. We use the Unscented Kalman Filter (UKF) to estimate the model and the inflation risk premium. The empirical evidence indicates that the expected inflation rate, as opposed to those derived from the consumer price indexes, is very stable and the inflation risk premia demonstrate a positive term structure.
Quadratic term structure model of interest rates TIPS Unscented Kalman filter Inflation risk premium
Ren-Raw Chen Bo Liu Xiaolin Cheng
Rutgers Business School, Finance Department, 94 Rockafeller Road, Piscataway, NJ, 08854 Fitch Ratings, One State Street Plaza, New York, NY, 10004 Moodys Investors Service, 99 Church Street, New York, NY, 10017
国际会议
成都
英文
1-52
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）