Presenter: Marcel Stechert, AU

Title: A simple estimate for TIPS liquidity risk

Abstract: Break-even inflation rates, i.e. the yield spread between nominal and inflation-protected treasury securities are an important measure of inflation expectations, but are subject to inflation and, most important in this paper, liquidity risk premia. This paper proposes a simple but convenient, i.e. largely model-free and data-driven, estimate of TIPS-specific liquidity risk at any maturity. It only requires a joint panel of nominal and TIPS yields and, thus, provides a yield-consistent and TIPS market specific liquidity risk premium estimate. First, this circumvents researchers to a-priori specify liquidity risk proxies and, second, it does not require estimation of a fully-fledge term structure model. Instead, static principal components can be used which is easy and fast. The resulting liquidity risk premium estimates show economically plausible dynamics.

PhD presentation as part of mandatory 1st or 3rd year presentation. The time is extended to one hour; the presenter has 40 minutes for the presentation, 5-10 minutes for the discussant, and 5-10 minutes for questions.

Organizers: Stefan Hirth and Anders Merrild Posselt