Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico

Remy Beauregard, Jens Christensen, Eric Fischer and Simon Zhu

No 961, Staff Reports from Federal Reserve Bank of New York

Abstract: To study inflation expectations and associated risk premia in emerging bond markets, this paper provides estimates for Mexico based on an arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for their liquidity risk. In addition to documenting the existence of large and time-varying liquidity premia in nominal and real bond prices that are only weakly correlated, the results indicate that long-term inflation expectations in Mexico are well anchored close to the inflation target of the Bank of Mexico. Furthermore, Mexican inflation risk premia are larger and more volatile than those in Canada and the United States.

Keywords: term structure modeling; liquidity risk; financial market frictions; central bank credibility (search for similar items in EconPapers)
JEL-codes: D84 E31 E47 E52 E58 G12 (search for similar items in EconPapers)
Pages: 51
Date: 2021-03-01
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Working Paper: Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico (2021)
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