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The Information Content of the Embedded Deflation Option in TIPS

Abstract: 

In this paper we estimate the value of the embedded option in U.S. Treasury Inflation Protected Securities (TIPS). The option value exhibits significant time variation that is correlated with periods of deflationary expectations. We use our estimated option values to construct an embedded option price index and an embedded option return index. We then use our embedded option indices as independent variables and examine their statistical and economic significance for explaining the future inflation rate. In most of our regressions, our embedded option return index is significant even in the presence of traditional inflation variables, such as the yield spread between nominal Treasuries and TIPS, the return on gold bullion, the VIX index return, and the lagged inflation rate. We conduct several robustness tests, including alternative weighting schemes, alternative variable specifications, and alternative data samples. We conclude that the embedded option in TIPS contains useful information for future inflation, both in-sample and out-of-sample. Our results should be valuable to practitioners, monetary authorities, and policymakers alike.

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La modelizaciónde la curva cero cupón local de Argentina presenta desafíos interesantes dado que es un mercado relativamente ilíquido y con bonos de estructura compleja. Este paper adapta la metodología de Nelson y Siegel a las particularidades del mercado argentino de forma de optimizar su performance.

Estimación de la Estructura Temporal de Tasas de Interés en el Caso Argentino

Resumen: Se evalúan dos métodos de estimación de la estructura temporal de tasas de interés para el caso de una curva invertida, con dos jorobas y poca granularidad como es la curva de bonos argentinos indexados a la inflación. Se contrasta un método paramétrico basado en fundamentos económicos, propuesto por Nelson y Siegel en 1987 y extendido por Svensson en 1994, con otro método clásico de interpolación basado en splines naturales.

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Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?

Abstract

Before the recent recession, the consensus among researchers was that the zero lower bound (ZLB) probably would not pose a significant problem for monetary policy as long as a central bank aimed for an inflation rate of about 2 percent; some have even argued that an appreciably lower target inflation rate would pose no problems.  This paper reexamines this consensus in the wake of the financial crisis, which has seen policy rates at their effective lower bound for more than two years in the United States and Japan and near zero in many other countries.  We conduct our analysis using a set of structural and time series statistical models.  We find that the decline in economic activity and interest rates in the United States has generally been well outside forecast confidence bands of many empirical macroeconomic models.  In contrast, the decline in inflation has been less surprising.  We identify a number of factors that help to account for the degree to which models were surprised by recent events.  First, uncertainty about model parameters and latent variables, which were typically ignored in past research, significantly increases the probability of hitting the ZLB.  Second, models that are based primarily on the Great Moderation period severely understate the incidence and severity of ZLB events.  Third, the propagation mechanisms and shocks embedded in standard DSGE models appear to be insufficient to generate sustained periods of policy being stuck at the ZLB, such as we now observe.  We conclude that past estimates of the incidence and effects of the ZLB were too low and suggest a need for a general reexamination of the empirical adequacy of standard models.  In addition to this statistical analysis, we show that the ZLB probably had a first-order impact on macroeconomic outcomes in the United States.  Finally, we analyze the use of asset purchases as an alternative monetary policy tool when short-term interest rates are constrained by the ZLB, and find that the Federal Reserve’s asset purchases have been effective at mitigating the economic costs of the ZLB.  In particular, model simulations indicate that the past and projected expansion of the Federal Reserve’s securities holdings since late 2008 will lower the unemployment rate, relative to what it would have been absent the purchases, by 1½ percentage points by 2012.  In addition, we find that the asset purchases have probably prevented the U.S. economy from falling into deflation.

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James Hamilton en EconBrowser tuvo la gentileza de compartir su base de datos sobre Deuda Publica Norteamericana para que otros investigadores la pudiera usar.

I have been working on a project with UCSD graduate student Cynthia Wu to try to assess the potential for the Federal Reserve to continue to influence long-term interest rates even when the short-term interest rate is essentially at zero. I’ll be relating the conclusions from that research in a few days. But first I’d like to call attention to a new data set that we developed on the maturity structure of publicly-held debt which may be of interest to other researchers. As Paul Krugman likes to warn, this one is just for the wonks.

(Fuente: FED Cleveland)

El viernes pasado se realizo la 5ta reunión del Club. Se presentaron 2 excelentes trabajos.

Leonardo Vicchi diserto sobre Metodos de Reduccion de Varianza en simulaciones de Monte Carlo para valuacion de derivados de volatilidad.

Mientras que Lucia Cipolina expuso Estimación de la Estructura Temporal de Tasas de Interés en el caso Argentino.