Arbeitspapier
On the inflation risks embedded in sovereign bond yields
The purpose of this paper is to study the compensation for in ation risks priced in sovereign bond yields. And we do so by modelling the time-varying dynamics of asset returns and inflation, and then estimating the cost of hedging in ation risks from the perspective of a well diversified portfolio. This allows to disentangle the time-varying compensation for expected and unexpected in ation shocks embedded in sovereign bond yields; and provides estimates of the real risk-free rate. We show that nominal sovereign bond yields for Germany, France, Japan and the United States, reflect, over the more recent years, a low real risk-free rate, as well as low levels of compensation for both expected and unexpected in ation. The simultaneous occurrence of these low contributions is novel, and not encountered previously in our sample. We also find that inflation risks are not necessarily reduced with the inclusion of real estate assets in the minimum variance portfolio. Our analysis also prompts us to suggest that the financial advantage of issuing in ation-linked sovereign debt, and namely saving on the embedded in ation risk premium of issuing nominal debt, appears to be eroded by the liquidity premium charged by investors for holding the less attractive inflation-linked debt asset.
- ISBN
-
978-92-899-4066-5
- Language
-
Englisch
- Bibliographic citation
-
Series: ECB Working Paper ; No. 2423
- Classification
-
Wirtschaft
Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Price Level; Inflation; Deflation
Portfolio Choice; Investment Decisions
Asset Pricing; Trading Volume; Bond Interest Rates
- Subject
-
Inflation Risks
Yields
Portfolio Choice
- Event
-
Geistige Schöpfung
- (who)
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Camba-Méndez, Gonzalo
- Event
-
Veröffentlichung
- (who)
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European Central Bank (ECB)
- (where)
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Frankfurt a. M.
- (when)
-
2020
- DOI
-
doi:10.2866/348453
- Handle
- Last update
-
10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Camba-Méndez, Gonzalo
- European Central Bank (ECB)
Time of origin
- 2020
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