James L. Bicksler

Capital asset prices versus time series models as predictors of inflation: The expected real rate of interest and market efficiency

Abstract This paper examines the robustness of one month treasury bills as predictors of inflation. The evidence is inconsistent with the joint hypothesis that (1) the expected real rate of interest was constant for one-month bills and (2) that markets are efficient with regard to the time series of inflation. When the expected real rate of interest is set equal to the conditional expectation given the time series of real rates, the results are much more consistent with the efficient markets model. In more positive terms, the failure to confirm market efficiency appears to be the result of naive estimates of the expected real rate.

More on Purchasing Power Risk, Portfolio Analysis and the Case for Index-Linked Bonds: Comment

In a recent provocative article, Sarnat [3] argues that there are welfare gains that result from the issuance of index-linked bonds. Sarnats argument consists of a graphical comparison of investor mean-variance efficient portfolios under conditions where the investment opportunity set includes (excludes) a constant purchasing power bond. The kernel of Sarnats comment is that the Tobin portfolio separation theorem does (not) hold in the presence (absence) of an index-linked bond.1 This in turn results in the efficiency locus for levered and unlevered portfolios denominated in real terms for a capital market having an index-linked bond dominating their counterpart efficient portfolios in a capital market scenario where there is the absence of an index-linked bond.2 In this note, it is argued that Sarnats portfolio mean-variance efficiency locus analysis contains a basic error which invalidates his argument. Both Black [1] and Vasicek [S] have shown that even in the absence of an individual riskless security (in the Sarnat capital market scenario, a single period index-linked government bond), the condition that investors can take unlimited short or long positions in any security is sufElcient to ensure that every efficient portfolio can be viewed as a weighted average of the market portfolio and the minimum variance zero-beta port-