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Federal Reserve Bank of San Francisco
Working Paper Series
Inflation expectations and risk premiums in an arbitrage-free model of nominal and real bond yields
Jens H. E. Christensen
Jose A. Lopez
Glenn D. Rudebusch
Abstract

Differences between yields on comparable-maturity U.S. Treasury nominal and real debt, the so-called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums from the BEI rates. We provide such decompositions using an estimated affine arbitrage-free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long-term inflation expectations have been well anchored over the past few years, and inflation risk premiums, although volatile, have been close to zero on average.


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Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, Inflation expectations and risk premiums in an arbitrage-free model of nominal and real bond yields, Federal Reserve Bank of San Francisco, Working Paper Series 2008-34, 2008.
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Keywords: Inflation (Finance) ; Treasury bonds
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