Department of Economics and Business Economics

The TIPS Liquidity Premium

Research output: Working paperResearch

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  • rp17_27

    Final published version, 987 KB, PDF-document

  • Martin Møller Andreasen
  • Jens H.E. Christensen, Federal Reserve Bank of San Francisco, United StatesSimon Simon Riddell, Amazon, United States
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 greatly helps our model in matching TIPS prices. Accounting for liquidity risk also improves the model's ability to forecast inflation and match inflation surveys, although none of these series are included in the estimation.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages49
StatePublished - 21 Aug 2017
SeriesCREATES Research Papers
Number2017-27

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