No. 968 - Price pressures in the UK index-linked market: an empirical investigation

by Gabriele Zinna
July 2014
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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.

Published in 2016 in: Review of Finance,v. 20, 4, pp. 1587-1630

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  1. 16 July 2014
    No. 968 - Price pressures in the UK index-linked market: an empirical investigation
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