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Published January 2004 | public
Journal Article

Empirical TIPS

Roll, Richard

Abstract

U.S. Treasury Inflation-Indexed Securities (commonly known as TIPS) were first issued in January 1997. Through the third quarter of 2003, 12 TIPS had been issued, with original maturities ranging from 5 to 30 years. One TIP bond has already matured. This study documents the correlations of TIPS returns with the returns on nominal bonds and with equity returns over the past seven years; TIPS real and effective nominal durations; and changes in the volatility of TIPS over time. TIPS are used here to estimate real yield curves, which are then compared against nominal yield curves to derive the term structure of anticipated inflation on a daily basis. An explanation offered for the dramatic decline in TIPS real yields since 1999 is supported by empirical tests. Finally, given plausible assumptions about future expected returns, the article shows that an investment portfolio diversified between U.S. equities and nominal bonds would be improved by the addition of TIPS.

Additional Information

© 2004 Chartered Financial Analysts Institute. I am indebted to Barclays Capital for making the TIPS data available, to Kevin Lee and Feifei Li for outstanding research assistance, and to seminar participants at the Harvard Business School, the Universität Konstanz, and the Universität Mannheim.

Additional details

Created:
August 19, 2023
Modified:
October 20, 2023