CREATES

Martin Møller Andreasen

The TIPS Liquidity Premium

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DOI

  • Martin M. Andreasen
  • Jens H.E. Christensen, Federal Reserve Bank
  • ,
  • Simon Riddell, Amazon.com, Inc.

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 helps our model to match TIPS prices. Accounting for liquidity risk also improves the model's ability to forecast inflation and match surveys of inflation expectations.

Original languageEnglish
JournalReview of Finance
Volume25
Issue6
Pages (from-to)1639-1675
Number of pages37
ISSN1572-3097
DOIs
Publication statusPublished - Nov 2021

Bibliographical note

Publisher Copyright:
© 2021 The Author(s) 2021. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved.

    Research areas

  • Financial market frictions, Liquidity risk, Term structure modeling

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