Which Price Index for Eurozone Index-Linked Bonds?

NRG Working Paper No. 06-10

28 Pages Posted: 3 Oct 2006

See all articles by Ivo J.M. Arnold

Ivo J.M. Arnold

Nyenrode University; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: May 2006

Abstract

Index-linked bonds (ILBs) constitute a small but growing segment of the eurozone bond market. Issuers of index-linked bonds face a choice between linking to either a eurozone or a national price index. This paper examines this choice both theoretically and empirically and ends up with the following conclusions. First, ILBs linked to eurozone inflation are much less useful for diversification purposes than nationally indexed ILBs. This is hard to square with the intended use of these bonds. Second, ILBs linked to national price indices are imperfect hedges for national inflation. The latter finding is counterintuitive and arises because of monetary union.

Keywords: Index-linked bonds, inflation, EMU

JEL Classification: E31, G11, H63

Suggested Citation

Arnold, Ivo J.M., Which Price Index for Eurozone Index-Linked Bonds? (May 2006). NRG Working Paper No. 06-10, Available at SSRN: https://ssrn.com/abstract=934494 or http://dx.doi.org/10.2139/ssrn.934494

Ivo J.M. Arnold (Contact Author)

Nyenrode University ( email )

3621 BG Breukelen
Netherlands
+31-346-291270 (Phone)
+31-346-291250 (Fax)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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