The potential advantages of Treasury inflation-protected securities have yet to be fully realized, mainly because TIPS are not as liquid as nominal Treasury securities. The less liquid nature of TIPS may adversely affect prices relative to those of nominal securities, offsetting the benefits of TIPS having no inflation risk. A study of TIPS, using novel tick data from the interdealer market, provides new evidence on the liquidity of the securities and how liquidity differs from that of nominal securities. Analysis of various liquidity measures suggests that trading activity and the incidence of posted quotes may be better cross-sectional gauges of TIPS liquidity than bid-ask spreads or quoted depth. Differences in intraday trading patterns and announcement effects between TIPS and nominal securities likely reflect the different use, ownership, and cash-flow attributes of the securities.
Michael J. Fleming and Neel Krishnan The Microstructure of the TIPS Market • The potential advantages of Treasury inflation- 1. Introduction protected securities have yet to be fully realized, mainly because TIPS are not as liquid as nominal Treasury securities. T he introduction of Treasury inflation-protected securities (TIPS) in the United States in 1997 offered multiple potential benefits. First, the development was intended to offer • The less liquid nature of TIPS may adversely investors a security that would enable them to hedge inflation. affect prices relative to those of nominal Seco
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