TIPS and the VIX: Spillovers from Financial Panic to Breakeven Inflation in an Automated, Nonlinear Modeling Framework

TIPS and the VIX: Spillovers from Financial Panic to Breakeven Inflation in an Automated,... This paper examines the determinants of the breakeven inflation rate (BEI) on U.S. Treasury Inflation Protected Securities. After controlling for several measures of liquidity, inflation expectations and inflation uncertainty; financial fear itself (proxied with the Volatility Index or VIX) remains a primary influence on BEI. To delve into the mechanism underlying this association, the VIX is decomposed, using intraday data, into conditional variance and the variance premium capturing risk aversion. Aside from the 2008 crisis, most of the effect emanated from the variance premium. Following the crisis, indicators of bank insolvency risk gain prominence as well. Lastly, an automated nonlinear model finds convex effects of variance, and diminishing returns to insolvency risk and liquidity. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Oxford Bulletin of Economics & Statistics Wiley

TIPS and the VIX: Spillovers from Financial Panic to Breakeven Inflation in an Automated, Nonlinear Modeling Framework

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
Copyright © 2018 The Department of Economics, University of Oxford and John Wiley & Sons Ltd
ISSN
0305-9049
eISSN
1468-0084
D.O.I.
10.1111/obes.12218
Publisher site
See Article on Publisher Site

Abstract

This paper examines the determinants of the breakeven inflation rate (BEI) on U.S. Treasury Inflation Protected Securities. After controlling for several measures of liquidity, inflation expectations and inflation uncertainty; financial fear itself (proxied with the Volatility Index or VIX) remains a primary influence on BEI. To delve into the mechanism underlying this association, the VIX is decomposed, using intraday data, into conditional variance and the variance premium capturing risk aversion. Aside from the 2008 crisis, most of the effect emanated from the variance premium. Following the crisis, indicators of bank insolvency risk gain prominence as well. Lastly, an automated nonlinear model finds convex effects of variance, and diminishing returns to insolvency risk and liquidity.

Journal

Oxford Bulletin of Economics & StatisticsWiley

Published: Jan 1, 2018

References

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