Wharton Research Scholars

Document Type

Other

Date of this Version

2013

Abstract

This paper examines, the TIPS Beta, a simple regression-based measure of the link between yields on Nominal U.S. Treasury bonds and Treasury Inflation Protected Securities (TIPS) using data beginning in January 2003. In the time period until late-2008 and early-2009, the Beta measure exhibited minor variations about a relatively stable level before subsequently displaying increased variability about a new, lower level. The change marks a deteriorating or less-persistent link between yields in the two markets, which this paper examines in more detail. In particular, a basic model of yields and interest rates movements is given, which is then used to simulate interest rates. By adding uncorrelated, idiosyncratic errors to the two markets, increased uncertainty in inflation expectations, and a shock to the TIPS liquidity premium, the behavior of the Beta statistic over the observed time period can be replicated.

Keywords

TIPS, US Treasury, Beta measure

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Date Posted: 28 October 2014