Management of Indexed Government Debt: Assessing the Case for an Inflation-Indexed Bond

Date

2007

Authors

Chen, Andrew
Chen, Elaine T
Terrell, Richard

Journal Title

Journal ISSN

Volume Title

Publisher

Inderscience Publishers

Abstract

Since The US Treasury's issuance of the inflation-protection securities (TIPS) in January 1997, there has been a great deal of renewed interest in studying various aspects of inflation-indexed bonds. This paper develops an equilibrium capital asset pricing model with uncertain inflation (CAPMUI), of which the Sharpe-Lintner-Mossin and the Roll models are the special cases. Based upon the CAPMUI, we analyse the impact of introducing inflation-indexed bonds on the risk-return relationships in the capital markets. Our analysis indicates that there is no a priori reason to believe that linking the bonds to the price level per se results in a welfare gain in risk-reduction in the capital markets. Our analysis indicates that a non-positive correlation between the return on the market portfolio and the rate of inflation is a sufficient condition for the introduction of indexed bonds to provide welfare gain in risk-reduction in the capital markets.

Description

Keywords

Keywords: Capital asset pricing models; Capital markets; Inflation-indexed bond; Correlation methods; Financial data processing; Marketing; Mathematical models; Risk analysis; Uncertain systems; Indexing (materials working) Capital asset pricing model; CAPM; Inflation-indexed bond; TIPS

Citation

Source

International Journal of Services Technology and Management

Type

Journal article

Book Title

Entity type

Access Statement

License Rights

DOI

10.1504/IJSTM.2007.013919

Restricted until

2037-12-31