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- Title
Pricing Deflation Risk with US Treasury Yields.
- Authors
Christensen, Jens H. E.; Lopez, Jose A.; Rudebusch, Glenn D.
- Abstract
We use an arbitrage-free term structure model with spanned stochastic volatility to determine the value of the deflation protection option embedded in Treasury inflation- protected securities. The model accurately prices the deflation protection option prior to the financial crisis when its value was near zero; at the peak of the crisis in late 2008 when deflationary concerns spiked sharply; and in the post-crisis period. During 2009, the average value of this option at the 5-year maturity was 41 basis points on a par-yield basis. The option value is shown to be closely linked to overall market uncertainty as measured by the VIX, especially during and after the 2008 financial crisis.
- Subjects
PRICING; PRICE deflation; FINANCIAL crises; BUSINESS cycles; GOVERNMENT securities
- Publication
Review of Finance, 2016, Vol 20, Issue 3, p1107
- ISSN
1572-3097
- Publication type
Article
- DOI
10.1093/rof/rfv029