Serving the Quantitative Finance Community
-
- sudhakar682
- Posts: 7
- Joined:
TIPS
Does it make sense for the TIPS (Treasury inflation protected securities) Index to be less price volatile than the Lehman Aggregate bond index in high inflation environments? Any comments would be highly appreciated. Thanks,
TIPS
I think it makes sense for TIPS index to have a lower volatility in virtually any environment. Reasoning behind this is simply that real yield tends to be more stable than nominal yield (real + inflation expectation). Of course the volatility also depends on the maturities of the bonds (I'm not sure if you can easily define a duration for TIPS).
TIPS
if you think about it then it should be obvious that TIPS should be less volatile than nominal bonds... the only thing that moves the TIP is the real interest rate. A nominal yield is is according the fisher theory a combination of real yields plus an inflation expectation... both volatile and one would argue positively correlated.
knowledge comes, wisdom lingers
-
- JackInTheBox
- Posts: 0
- Joined:
TIPS
Why must inflation expectation be positively correlated with nominal rates? Args can be made for rising rates to lower inflation expectation and vice versa. Therefore on a balanced basis, the correlation may just be zero.
