Information Aggregation, Inflation, and the Pricing of Indexed Bonds

Gur Huberman
Columbia University, New York, NY

G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

Journal of Political Economy, 93 (February 1985) 92-114

Using daily prices of indexed bonds between 1970 and 1979, we test whether announcements of the Israeli CPI contain information that is not already reflected in bond prices. The results indicate that bond prices reflect about 85 percent of the new information about inflation as it occurs (i.e., when the Central Bureau of Statistics samples prices.) The announcement of the CPI 15 days after the end of the sampling period causes the remaining 15 percent adjustment in bond prices. This evidence raises questions about the empirical importance of misperceptions of inflation as a source of nonneutrality in monetary policy.

Key words: Inflation, Index bonds, Rational expectations, Efficient Markets

JEL Classifications: G14, E31, E43

Cited 28 times in the SSCI and SCOPUS through 2014
© Copyright 1985, University of Chicago

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