Inflation Derivatives Under Inflation Target Regimes

Mordecai Avriel (), Jens Hilscher and Alon Raviv
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Mordecai Avriel: Technion-Israel Institute of Technology

No 43, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: Inflation targeting -- the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target -- has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the pricing of inflation derivatives. We develop a flexible model of inflation targeting in which the central bank's intervention to steer inflation towards the target depends on past deviations and the policymaker's ability or will to enforce the target. We use our model to price inflation derivatives and demonstrate the impact of inflation targeting on derivative pricing.

Keywords: Inflation derivatives; Inflation targeting; Target zones; Option pricing (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2012-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP43.pdf First version, 2012 (application/pdf)

Related works:
Journal Article: Inflation Derivatives Under Inflation Target Regimes (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:brd:wpaper:43

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