TY - JOUR
T1 - The informational content of the embedded deflation option in TIPS
AU - Grishchenko, Olesya V.
AU - Vanden, Joel M.
AU - Zhang, Jianing
N1 - Funding Information:
We thank Marco Avellaneda, Jean Helwege, Jay Huang, Philipp Illeditsch, Ravi Jagannathan, Igor Kozhanov, Dilip Madan, Franck Moraux, George Pennacchi, Jennifer Roush, Oreste Tristani, Min Wei, and Jonathan Wright. We also thank participants of the special mathematical finance session of the American Mathematical Society at Penn State University (October 2009); conference participants at the 2010 AFFI meetings in Saint-Malo, France; the 2010 EFA meetings in Frankfurt, Germany; the 8th International Paris Finance meeting; the 2011 FIRS meeting in Sydney, Australia; the 2011 Northern Finance Association meeting in Vancouver, British Columbia; the 2011 FMA meetings in Denver, Colorado; the 18th International Conference on Computing in Economics and Finance; the 2013 MFA conference in Chicago; the 2013 Darla Moore School of Business Fixed Income conference; as well as seminar participants at the Federal Reserve Board, Goethe University, New Economic School, Penn State University, and the Research in Transition (RIT) seminar at the University of Maryland, College Park. We also thank Andrew Meldrum of Bank of England and James Knight of the UK Debt Management Office for providing us with gilts data. We are grateful to two anonymous referees for their comments. This work is partly sponsored by Shanghai Pujiang Program. The views expressed in this paper are those solely of the authors and do not necessarily represent those of the Federal Reserve Board and Federal Reserve System. The usual disclaimer applies.
Publisher Copyright:
© 2016 Elsevier B.V.
PY - 2016/4/1
Y1 - 2016/4/1
N2 - We estimate the value of the embedded option in U.S. Treasury Inflation-Protected Securities (TIPS). The embedded option value exhibits time variation that is correlated with periods of deflationary expectations. We construct embedded option explanatory variables that are statistically and economically significant for explaining future inflation, even in the presence of traditional inflation variables such as lagged inflation, the gold return, the crude oil return, the VIX return, liquidity, surveys, and the yield spread between nominal Treasuries and TIPS. After conducting robustness tests, we conclude that the TIPS embedded option contains useful information for future inflation.
AB - We estimate the value of the embedded option in U.S. Treasury Inflation-Protected Securities (TIPS). The embedded option value exhibits time variation that is correlated with periods of deflationary expectations. We construct embedded option explanatory variables that are statistically and economically significant for explaining future inflation, even in the presence of traditional inflation variables such as lagged inflation, the gold return, the crude oil return, the VIX return, liquidity, surveys, and the yield spread between nominal Treasuries and TIPS. After conducting robustness tests, we conclude that the TIPS embedded option contains useful information for future inflation.
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U2 - 10.1016/j.jbankfin.2015.12.004
DO - 10.1016/j.jbankfin.2015.12.004
M3 - Article
AN - SCOPUS:84955321197
SN - 0378-4266
VL - 65
SP - 1
EP - 26
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
ER -