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Bonds and time varying risk premia

Subject

Finance

Publishing details

IFA Working Paper

Authors / Editors

Buraschi A;Squassi G

Publication Year

1996

Abstract

How large is the potential savings for the Treasury to issue real bonds? In this paper we estimate the risk premium on the level and volatility of inflation rate embedded in nominal default free bonds. We propose a preference free asset pricing specification that allows for time varying risk premia. The empirical analysis take advantage of a new approach to estimate the spot curve of index linked bonds based on the forward curve of nominal bonds. We find that the risk premium on the inflation rate is significantly time varying and it has been on average 110 bp. The uncertainty on the inflation rate, proxied by its conditional variance, does not result priced once we control for the risk premium on the level of inflation.

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 246

Series

IFA Working Paper

Available on ECCH

No


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