Template-Type: ReDIF-Paper 1.0
Author-Name: Athanasios Geromichalos
Author-Name-First: Athanasios
Author-Name-Last: Geromichalos
Author-Name: Lucas Herrenbrueck
Author-Name-First: Lucas
Author-Name-Last: Herrenbrueck
Author-Name: Changhyun Lee
Author-Name-First: Changhyun
Author-Name-Last: Lee
Author-Name: Sukjoon Lee
Author-Name-First: Sukjoon
Author-Name-Last: Lee
Author-Workplace-Name: Department of Economics, University of California Davis
Title: What’s so Inconvenient About TIPS?
Abstract: We build on recent developments in the theory of money and liquidity to provide a qualitative
 and quantitative explanation for the well-known TIPS illiquidity vis-`a-vis noninflation-
 protected Treasuries. Our model does not assume exogenous differences between
 the markets where the two assets are traded or the investors who hold them; instead,
 an asset’s liquidity is endogenous and depends on the trading and market entry
 decisions of investors. The model offers a powerful amplification mechanism that operates
 upon only one difference between TIPS and Treasuries: the far greater supply of
 the latter. We also quantify how much the Treasury leaves on the table by issuing securities
 that are not as highly valued by the market as nominal Treasuries. However, the
 model does not necessarily imply that the Treasury should phase out TIPS, as some have
 suggested, only that it should seek to reduce segmentation and ensure that TIPS trade
 alongside nominal Treasuries in consolidated secondary markets.
Length: 37
File-URL: https://repec.dss.ucdavis.edu/files/legpw41wfggp7k9ipfr3nix4n8iw/TIPS_November_24.pdf
File-Format: application/pdf
Number: 364
Classification-JEL: E31, E43, E52, G12
KeyWords: Monetary-search models, OTC markets, Endogenous liquidity, Treasury securities, Treasury Inflation-Protected Securities (TIPS)
Creation-Date: 20241202
Handle: RePEc:cda:wpaper:364