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Working Paper
Term structures of inflation expectations and real interest rates
Revised September 2016. In this paper, I use a statistical model to combine various surveys to produce a term structure of inflation expectations--inflation expectations at any horizon--and an associated term structure of real interest rates. Inflation expectations extracted from this model track realized inflation quite well, and in terms of forecast accuracy, they are at par with or superior to some popular alternatives. Looking at the period 2008.2015, I conclude that long-run inflation expectations remained anchored, and the policies of the Federal Reserve provided a large level of ...
Working Paper
Forecasts of inflation and interest rates in no-arbitrage affine models
In this paper, we examine the forecasting ability of an affine term structure framework that jointly models the markets for Treasuries, inflation-protected securities, inflation derivatives, and oil future prices based on no-arbitrage restrictions across these markets. On the methodological side, we propose a novel way of incorporating information from these markets into an affine model. On the empirical side, two main findings emerge from our analysis. First, incorporating information from inflation options can often produce more accurate inflation forecasts than those based on the Survey of ...
Report
Decomposing real and nominal yield curves
We present an affine term structure model for the joint pricing of Treasury Inflation-Protected Securities (TIPS) and Treasury yield curves that adjusts for TIPS? relative illiquidity. Our estimation using linear regressions is computationally very fast and can accommodate unspanned factors. The baseline specification with six principal components extracted from Treasury and TIPS yields, in combination with a liquidity factor, generates negligibly small pricing errors for both real and nominal yields. Model-implied expected inflation provides a better prediction of actual inflation than ...
Working Paper
Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices
Treasury Inflation-Protected Securities (TIPS) are frequently thought of as risk-free real bonds. Using no-arbitrage term structure models, we show that TIPS yields exceeded risk-free real yields by as much as 100 basis points when TIPS were first issued and up to 300 basis points during the recent financial crisis. This spread reflects predominantly the poorer liquidity of TIPS relative to nominal Treasury securities. Other factors, including the indexation lag and the embedded deflation protection in TIPS, play a much smaller role. Ignoring this spread also significantly distorts the ...
Working Paper
Inflation Expectations and the News
This paper provides new evidence on the importance of inflation expectations for variation in nominal interest rates, based on both market-based and survey-based measures of inflation expectations. Using the information in TIPS breakeven rates and inflation swap rates, I document that movements in inflation compensation are important for explaining variation in long-term nominal interest rates, both unconditionally as well as conditionally on macroeconomic data surprises. Daily changes in inflation compensation and changes in long-term nominal rates generally display a close statistical ...