FRIC Lunch Seminar with Jens Christensen, Federal Reserve Bank of San Francisco
FRIC Center for Financial Frictions and the Department of Finance are pleased to announce the upcoming FRIC Lunch Seminar with Jens Christensen, Federal Reserve Bank of San Francisco.
Title: The TIPS Liquidity Premium
We introduce an arbitrage-free term structure model of nominal and real yields that accounts for liquidity risk in Treasury inflation-protected securities (TIPS). The novel feature of our model is to identify liquidity risk from individual TIPS prices by accounting for the tendency that TIPS, like most fixed-income securities, go into buy-and-hold investors’ portfolios as time passes. We find a sizable and countercyclical TIPS liquidity premium, which greatly helps our model in matching TIPS prices. Accounting for liquidity risk also improves the model’s ability to forecast inflation and match surveys of inflation expectations, although none of these series are included in the estimation.
Keywords: term structure modeling, liquidity risk, financial market frictions
Solbjerg Plads 3, 2000 Frederiksberg
Room: Augustinus Senate Meeting Room