Investigating Excess Returns from Nominal Bonds

F Breedon, Jagjit Singh Chadha

    Research output: Contribution to journalArticlepeer-review

    3 Citations (Scopus)

    Abstract

    Estimated real returns on nominal bonds show excess returns of some 200 bp over their index-linked equivalent. This paper considers two possible explanations for this large difference. First, we assess the likely inflation risk premium by calibrating a model of optimal bond prices under uncertainty. Employing either of CRRA or Abel (1990) relative consumption utility function to derive the stochastic discount factor and covariation risk, we suggest that the inflation risk component of this excess return is unlikely to be much above 50 bp. Secondly, we find little evidence that these excess returns can be ascribed to consistent expectational errors in predicting inflation.

    Original languageEnglish
    Pages (from-to)73-90
    Number of pages18
    JournalOxford Bulletin of Economics and Statistics
    Volume65
    Issue number1
    DOIs
    Publication statusPublished - Feb 2003

    Keywords

    • INTEREST-RATES
    • TERM STRUCTURE
    • REAL RATES
    • INFLATION
    • PRICES
    • RISK

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