Inflation-Adjusted Bonds, Swaps, and Derivatives

Robert Jarrow () and Yildiray Yildirim ()
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Yildiray Yildirim: Zicklin School of Business, Baruch College, The City University of New York (CUNY), New York, NY, USA

Annual Review of Financial Economics, 2023, vol. 15, issue 1, 449-471

Abstract: The purpose of this article is to review the literature on inflation-adjusted bonds, swaps, and derivatives. The methodology for valuation and risk management of these securities is an application of the foreign currency extension of a standard HJM term structure model. The two “currencies” in the extended model are real and nominal prices. Currently, for their use in monetary policy, the empirical literature primarily uses these models to estimate both the expected inflation rate and the inflation risk premium. A literature investigating the efficiency of the inflation derivative markets and a comparison of the relevant valuation models is almost nonexistent and a fruitful area for future research.

Keywords: inflation-indexed bonds; inflation swaps; inflation derivatives; HJM model; term structure of interest rates; break-even inflation rate (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1146/annurev-financial-110921-110855

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