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The Journal of Fixed Income

The Journal of Fixed Income

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Primary Article

Duration and Pricing of TIPS

Gady Jacoby and Ilona Shiller
The Journal of Fixed Income Fall 2008, 18 (2) 71-84; DOI: https://doi.org/10.3905/jfi.2008.712351
Gady Jacoby
Stuart Clark Professor in Financial Management at the I.H.Asper School of Business at the University of Manitoba in Winnipeg, MB, Canada. jacobyg@ms.umanitoba.ca
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Ilona Shiller
an assistant professor in the Department of Finance at the Faculty of Business Administration at the University of New Brunswick in Fredericton,NB, Canada. ishiller@unb.ca
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Abstract

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.

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The Journal of Fixed Income
Vol. 18, Issue 2
Fall 2008
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Duration and Pricing of TIPS
Gady Jacoby, Ilona Shiller
The Journal of Fixed Income Sep 2008, 18 (2) 71-84; DOI: 10.3905/jfi.2008.712351

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Duration and Pricing of TIPS
Gady Jacoby, Ilona Shiller
The Journal of Fixed Income Sep 2008, 18 (2) 71-84; DOI: 10.3905/jfi.2008.712351
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