 Market risk and market-implied inflation expectationsLucjan Orlowski and Carolyne Soper International Review of Financial Analysis, 2019, vol. 66, issue C Abstract: We examine interactions between market risk and market-implied inflation expectations. We argue that these interactions are asymmetric and varied in time. Specifically, market risk becomes elevated by expectations of either very low or high expected inflation. Market risk does not react to expectations of moderate, stable inflation. In our analysis, market risk is proxied by VIX and market-implied inflation expectations are reflected by five- and ten-year breakeven inflation. We use daily data for 5 and 10 year breakeven inflation and VIX for the sample period January 3, 2003–January 24, 2019 for empirical testing. We employ asymptotic VAR, multiple breakpoint regression and Markov switching tests to examine changeable patterns in these interactions. Our tests indicate prevalence of responses of expected low inflation or deflation to higher market risk, mainly for the 5-year breakeven inflation series. These responses are particularly significant during the run-up and aftermath of the 2008 financial crisis. Keywords: Market risk; VIX; Inflation risk; Breakeven inflation; Bai-Perron multiple breakpoint regression; Asymptotic VAR; Markov switching (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:66:y:2019:i:c:s1057521919301978 DOI: 10.1016/j.irfa.2019.101389 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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