Inflation expectations derived from a portfolio model

Enrique Covarrubias and Gerardo Hernández-del-Valle

MPRA Paper from University Library of Munich, Germany

Abstract: This paper proposes a new methodology for extracting inflation expectations from financial markets. For this purpose, a synthetic financial asset is built whose returns are matched with the inflation rate by construction. The methodology estimates the implicit return expected by the market on this asset through a portfolio valuation approach; in other words, implicit inflation expectations are obtained. This approach clarifies the mechanisms behind a negative risk premium: an inflation-linked bond is attractive to an investor when high inflation is expected or when generalized low returns are observed; in both cases, a yield below expected returns is observed.

Keywords: Inflation expectations; bond markets; breakeven. (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 G11 G12 (search for similar items in EconPapers)
Date: 2016-02-11
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:69489

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