Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/169388
Authors: 
Driessen, Joost
Nijman, Theo E.
Simon, Zorka
Year of Publication: 
2017
Series/Report no.: 
SAFE Working Paper Series 183
Abstract: 
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.
Subjects: 
liquidity premium
liquidity risk
TIPS
inflation swaps
TIPS-Treasury puzzle
JEL: 
C51
G12
G01
H63
Document Type: 
Working Paper

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