TY  - JOUR
AU  - Patel,Jayendu
AU  - Zeckhauser,Richard J.
TI  - Treasury Bill Futures as Hedges Against Inflation Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2322
PY  - 1987
Y2  - July 1987
UR  - http://www.nber.org/papers/w2322
L1  - http://www.nber.org/papers/w2322.pdf
N1  - Author contact info:
Jayendu Patel
Harvard University
E-Mail: jayendupatel@gmail.com

Richard J. Zeckhauser
John F. Kennedy School of Government
Harvard University
79 John F. Kennedy Street
Cambridge, MA  02138
Tel: 617/495-1174
Fax: 617/384-9340
E-Mail: richard_zeckhauser@harvard.edu
M2  - featured in NBER digest on 1987-09-01
AB  - An important risk facing agents in a monetary economy arises from inflation uncertainty: in the U.S. for the 1953-84 period, unexpected quarterly inflation had a standard deviation of 2.1%. The costs of such uncertainty are likely to be even higher for multi-year contracts, since we estimate that a 1% unexpected inflation this year implies an upward revision of 0.43% for expected inflation for the forthcoming year and 1% for the years beyond that. The prospect of hedging inflation risk exposure using conventional financial instruments is bleak, as has been widely documented. We develop a theoretical case for Treasury bill futures as a inflation risk hedge by jointly assuming that (1) the Fisher Hypothesis applies to Treasury bill yields, (2) the Unbiased Expectations Hypothesis (UEH) applies to futures prices, and (3) inflation is an autoregressive process. Our empirical analysis shows that Treasury bill futures can reduce single-period inflation risk by about 30-40%. The expected cost of using such futures is close to zero, since we find that the Unbiased Expectations Hypothesis for Treasury bill futures cannot be rejected. Our results provide new indirect support for the Fisher Hypothesis.
ER  -