Asset returns and inflation

Strategic Asset Allocation: Portfolio Choice for Long‐Term Investors.

We show that the price of a Treasury bond and an inflation-swapped TIPS issue exactly replicating the cash flows of the Treasury bond can differ by more than $20 per $100 notional. Treasury bonds are almost always overvalued relative to TIPS. Total TIPS-Treasury mispricing has exceeded $56 billion, representing nearly eight percent of the total amount of TIPS outstanding. TIPS-Treasury mispricing is strongly related to supply factors such as Treasury debt issuance and the availability of collateral in the financial markets, and is correlated with other types of fixed-income arbitrages, These results pose a major puzzle to classical asset pricing theory. In addition, they raise the issue of why the Treasury issues TIPS, since in so doing it both gives up a valuable fiscal hedging option and leaves large amounts of money on the table.

Why Does the Treasury Issue TIPS? The TIPS-Treasury Bond Puzzle

https://mpra.ub.uni-muenchen.de/56857/1/MPRA_paper_56857.pdf

The Role of Islamic Asset Classes in the Diversified Portfolios: Mean Variance Spanning Test

A measure of the public’s expectation of inflation would assist the Fed in formulating monetary policy. In order to create such a measure, the U.S. Treasury could issue its debt in two forms: standard debt and debt indexed for inflation. The difference in yield on these two forms of debt would measure the public’s expectation of inflation.

Indexed Bonds as an Aid to Monetary Policy

In this paper, we solve an optimal portfolio choice problem to measure the bene fits of Treasury Inflation Indexed Securities (TIPS) to investors concerned with maximizing real wealth. We show how the introduction of a real riskless asset completes the investor asset space, by contrasting optimal portfolio allocations with and without such assets. We use historical data to quantify gains from availability of TIPS in the presence of other asset classes such as equities, commodities, and real estate. We draw a distinction between buy-and-hold long-term investors for whom TIPS fully displace nominal riskfree assets and short-term investors for whom TIPS improve the investment opportunity set of real returns. Finally, we show how gains from TIPS are tempered by availability of alternative assets that covary with inflation, such as gold and real estate.

Jonatan Saúl

Papers

Optimal Portfolio Choice in Real Terms: Measuring the Benefits of TIPS

Optimal portfolio choice in real terms: Measuring the benefits of TIPS