Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/229037
Authors: 
Camba-Méndez, Gonzalo
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2423
Abstract: 
The purpose of this paper is to study the compensation for in ation risks priced in sovereign bond yields. And we do so by modelling the time-varying dynamics of asset returns and inflation, and then estimating the cost of hedging in ation risks from the perspective of a well diversified portfolio. This allows to disentangle the time-varying compensation for expected and unexpected in ation shocks embedded in sovereign bond yields; and provides estimates of the real risk-free rate. We show that nominal sovereign bond yields for Germany, France, Japan and the United States, reflect, over the more recent years, a low real risk-free rate, as well as low levels of compensation for both expected and unexpected in ation. The simultaneous occurrence of these low contributions is novel, and not encountered previously in our sample. We also find that inflation risks are not necessarily reduced with the inclusion of real estate assets in the minimum variance portfolio. Our analysis also prompts us to suggest that the financial advantage of issuing in ation-linked sovereign debt, and namely saving on the embedded in ation risk premium of issuing nominal debt, appears to be eroded by the liquidity premium charged by investors for holding the less attractive inflation-linked debt asset.
Subjects: 
Inflation Risks
Yields
Portfolio Choice
JEL: 
C32
E31
G11
G12
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4066-5
Document Type: 
Working Paper

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