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Information Risk in TIPS Market: An Analysis of Nominal and Real Interest Rates |
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| Authors: | |
| Institution: | (1) Department of Finance, Insurance, and Real Estate, The Fogelman College of Business and Economics, The University of Memphis, Memphis, TN, 38152;(2) Department of Economics and Business, Rhodes College, Memphis, TN, 38112;(3) Finance and Business Law Department, College of Business and Economics, University of Wisconsin-Whitewater, WI, 53190 |
| Abstract: | This study investigates the presence of information risk in two closely linked interest rate securities traded in separate markets: the nominal interest rate observed in the Treasury bond market and the real interest rate observed in the relatively new Treasury Inflation-Protected Securities (TIPS) market. We find that information flows unilaterally from the Treasury bond market to the TIPS market with a one-day lag. The information risk arising from asymmetric information flows may cause less informed traders to demand a higher rate of return (O Hara, 2003). Our study provides an empirical explanation of why the TIPS yield has been relatively high throughout its nascent trading history. |
| Keywords: | Treasury inflation-protected securities real interest rate information risk vector error correction model |
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