Information Risk in TIPS Market: An Analysis of Nominal and Real Interest Rates

This study investigates the presence of information risk in two closely linked interest rate securities traded in separate markets: the nominal interest rate observed in the Treasury bond market and the real interest rate observed in the relatively new Treasury Inflation-Protected Securities (TIPS) market. We find that information flows unilaterally from the Treasury bond market to the TIPS market with a one-day lag. The information risk arising from asymmetric information flows may cause less informed traders to demand a higher rate of return (O’Hara, 2003). Our study provides an empirical explanation of why the TIPS yield has been relatively high throughout its nascent trading history. Copyright Springer Science + Business Media, Inc. 2005Treasury inflation-protected securities, real interest rate, information risk, vector error correction model,