TY  - JOUR
AU  - Pflueger,Carolin E.
AU  - Viceira,Luis M.
TI  - Inflation-Indexed Bonds and the Expectations Hypothesis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16903
PY  - 2011
Y2  - March 2011
UR  - http://www.nber.org/papers/w16903
L1  - http://www.nber.org/papers/w16903.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 empirically analyzes the Expectations Hypothesis (EH) in inflation-indexed (or real) bonds and in nominal bonds in the US and in the UK. We strongly reject the EH in inflation-indexed bonds, and also confirm and update the existing evidence rejecting the EH in nominal bonds. This rejection implies that the risk premium on both real and nominal bonds varies predictably over time. We also find strong evidence that the spread between the nominal and the real bond risk premium, or the break-even inflation risk premium, also varies over time. We argue that the time variation in real bond risk premia mostly likely reflects both a changing real interest rate risk premium and a changing liquidity risk premium, and that the variability in the nominal bond risk premia reflects a changing inflation risk premium. We estimate significant time series variability in the magnitude and sign of bond risk premia.
ER  -