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
