TY  - JOUR
AU  - Pflueger,Carolin E.
AU  - Viceira,Luis M.
TI  - An Empirical Decomposition of Risk and Liquidity in Nominal and Inflation-Indexed Government Bonds
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16892
PY  - 2011
Y2  - March 2011
UR  - http://www.nber.org/papers/w16892
L1  - http://www.nber.org/papers/w16892.pdf
N1  - Author contact info:
Carolin Pflueger
Sauder School of Business
University of British Columbia
2053 Main Mall
Vancouver, BC, V6T 1Z2
Canada
E-Mail: carolin.pflueger@sauder.ubc.ca

Luis M. Viceira
George E. Bates Professor
Harvard Business School
Baker Library 367
Boston, MA 02163
Tel: 617/495-6331
Fax: 617/496-7379
E-Mail: lviceira@hbs.edu
AB  - This paper decomposes inflation-indexed and nominal government bond excess return predictability into liquidity, real interest rate risk and inflation risk. We estimate a systematic liquidity premium in Treasury Inflation Protected Securities (TIPS) yields relative to nominal yields. The liquidity premium is around 30 bps during normal times but larger during the early years of TIPS and during the financial crisis 2008-2009. We find that time-varying liquidity premia in TIPS and time-varying inflation risk premia in nominal bonds generate return predictability. We find no evidence that shocks to relative issuance generate bond return predictability in the US or UK.
ER  -