CMStatistics 2016: Start Registration
View Submission - CFE
A1633
Title: TIPS liquidity premium and quantitative easing Authors:  Laura Coroneo - University of York (United Kingdom) [presenting]
Abstract: In the context of a state-space model for nominal and TIPS yields, we identify the liquidity premium in the TIPS market as the common component in TIPS yields that is unspanned by nominal yields. This identifying assumption allows us to obtain a measure of the liquidity premium in the TIPS market that does not require selecting a market liquidity proxy, specifying a term structure model, or using inflation swaps. We estimate a joint state-space model for nominal and TIPS yields that treats the liquidity premium in the TIPS market as an unobservable component that we extract simultaneously with the yield curve factors. Using daily US yields, we find that the TIPS liquidity premium explains up to 22\% of the variation in TIPS yields and that it sharply spiked during the 2008 financial crisis. We also find evidence of a flight to liquidity effect in the US Treasury market, as yields on nominal bonds decrease following a shock to the liquidity premium in the TIPS market. In addition, a counterfactual exercise shows that the QE2 programme had only limited effect on the liquidity premium in the TIPS market.