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Price pressures in the UK index-linked market: an empirical investigation

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  • Gabriele Zinna

    (Bank of Italy)

Abstract

We investigate the impact of long term investors' demand for UK index-linked gilts on the term structure of real rates for the 1987-2012 period. This is done by carrying out a structural estimation of the preferred-habitat model of Vayanos and Vila (2009). We use data on long-term investors' holdings of inflation-linked gilts by long-term investors, issuance of index-linked bonds and average maturity to identify the impact of supply/demand imbalances on rates. We find that demand pressure from long-term investors contributed to the decline in longer-term real rates over the 1987-2012 period by compressing bond risk premia. Before 2000, the fall in rates is largely due to the in-creasing demand pressure exerted by UK pension funds. Foreign institutional investors' demand in-stead played an important role in the subsequent decade.

Suggested Citation

  • Gabriele Zinna, 2014. "Price pressures in the UK index-linked market: an empirical investigation," Temi di discussione (Economic working papers) 968, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_968_14
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    Cited by:

    1. Giuseppe Grande & Sergio Masciantonio & Andrea Tiseno, 2014. "The interest-rate sensitivity of the demand for sovereign debt. Evidence from OECD countries (1995-2011)," Temi di discussione (Economic working papers) 988, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    institutional investors; term structure of real rates; price pressures; Bayesian estimation;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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