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- Title
TIPS Liquidity Premium*.
- Authors
Andreasen, Martin M; Christensen, Jens H E; Riddell, Simon
- Abstract
We introduce an arbitrage-free term structure model of nominal and real yields that accounts for liquidity risk in Treasury inflation-protected securities (TIPS). The novel feature of our model is to identify liquidity risk from individual TIPS prices by accounting for the tendency that TIPS, like most fixed-income securities, go into buy-and-hold investors' portfolios as time passes. We find a sizable and countercyclical TIPS liquidity premium, which helps our model to match TIPS prices. Accounting for liquidity risk also improves the model's ability to forecast inflation and match surveys of inflation expectations.
- Subjects
TREASURY bills; LIQUIDITY (Economics); INFLATION forecasting
- Publication
Review of Finance, 2021, Vol 25, Issue 6, p1639
- ISSN
1572-3097
- Publication type
Article
- DOI
10.1093/rof/rfab018