PT  - JOURNAL ARTICLE
AU  - Gady Jacoby
AU  - Ilona Shiller
TI  - Duration and Pricing of TIPS
AID  - 10.3905/jfi.2008.712351
DP  - 2008 Sep 30
TA  - The Journal of Fixed Income
PG  - 71--84
VI  - 18
IP  - 2
4099  - https://pm-research.com/content/18/2/71.short
4100  - https://pm-research.com/content/18/2/71.full
AB  - We apply risk-neutral valuation to price TIPS bonds issued by the U.S. Treasury, paying close attention to an option embedded in these bonds that guaranties that bondholders are not affected by deflation. The value of this option is assumed to be trivial in the extant literature. We use a numerical simulation to show that the option value is nontrivial. We also consider the elasticity of TIPS bonds with respect to the real rate and the nominal rate and compare it to the Macaulay duration. An empirical test provides strong support for the adjustment suggested by our model for the elasticity of TIPS bonds.TOPICS: Asset-backed securities (ABS), legal/regulatory/public policy, statistical methods, simulations