@techreport{3cab2c589d1345fe8bf0f6d1067db4e8,
title = "The Missing Piece of the Puzzle: Liquidity Premiums in Inflation-Indexed Markets",
abstract = "Fleckenstein et al. (2014) document that nominal Treasuries trade at higher prices than inflation-swapped indexed bonds, which exactly replicate the nominal cash flows. We study whether this mispricing arises from liquidity premiums in inflation-indexed bonds (TIPS) and inflation swaps. Using US data, we show that the level of liquidity affects TIPS, whereas swap yields include a liquidity risk premium. We also allow for liquidity effects in nominal bonds. These results are based on a model with a systematic liquidity risk factor and asset-specific liquidity characteristics. We show that these liquidity (risk) premiums explain a substantial part of the TIPS underpricing.",
keywords = "liquidity premium, liquidity risk, TIPS, inflation swaps, TIPS-treasury puzzle",
author = "Joost Driessen and Theo Nijman and Z. Simon",
year = "2017",
doi = "10.2139/ssrn.3042506",
language = "English",
series = "SAFE Working Paper",
publisher = "SSRN",
type = "WorkingPaper",
institution = "SSRN",
}