Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93585
Authors: 
Abrahams, Michael
Adrian, Tobias
Crump, Richard K.
Moench, Emanuel
Year of Publication: 
2012
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 570
Abstract: 
We present an affine term structure model for the joint pricing of Treasury Inflation-Protected Securities (TIPS) and Treasury yield curves that adjusts for TIPS' relative illiquidity. Our estimation using linear regressions is computationally very fast and can accommodate unspanned factors. The baseline specification with six principal components extracted from Treasury and TIPS yields, in combination with a liquidity factor, generates negligibly small pricing errors for both real and nominal yields. Model-implied expected inflation provides a better prediction of actual inflation than breakeven inflation. The value of the deflation floor calculated from the model is generally small in magnitude, but spiked during the recent crisis.
Subjects: 
TIPS
inflation expectations
affine term structure models
JEL: 
G12
E44
Document Type: 
Working Paper

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