Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields

2010/08/18 by JENS H. E. CHRISTENSEN, Jens H. E. Christensen, Jose A. Lopez +3 · 1 citation
Economics, Econometrics and Finance · #Stochastic processes and financial applications #Monetary Policy and Economic Impact #Credit Risk and Financial Regulations

paper · doi:10.1111/j.1538-4616.2010.00332.x

Abstract

Differences between yields on comparable‐maturity U.S. Treasury nominal and real debt, the so‐called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage‐free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long‐term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.

Citations

• Parsimonious Modeling of Yield Curves

Cited by

• Inflation expectations and risk premia in emerging bond markets: Evidence from Mexico

Related

• Inflation-rate Derivatives: From Market Model to Foreign Currency Analogy
• Inflation securities valuation with macroeconomic-based no-arbitrage\n dynamics
• Getting to the Core: Inflation Risks Within and Across Asset Classes
• Rational Models for Inflation-Linked Derivatives
• Mixing it up: Inflation at risk