Abstract
AbstractWe estimate term structure using Korean financial data such as nominal spot rates, monthly inflation rates, and a survey of inflation forecasts, and examine the factors affecting Korean inflation‐linked bond prices. Inflation‐linked bond market yields are higher than the model yields generated using the term structure and the market‐model yield differential is explained by the expected inflation rate, on‐the‐run/off‐the‐run spread, trading volume, and bond fund cash flows. This shows that inflation‐linked bond investors understand the additional benefit of the tax exemption on the notional amount increment caused by inflation that the term structure model ignores, and the inflation‐linked bond price is also affected by liquidity and supply–demand pressure.
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