How likely is an inflation disaster?

Jens Hilscher, Alon Raviv and Ricardo Reis

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Long-dated inflation swap contracts provide widely used estimates of expected inflation. We develop methods to estimate complementary tail probabilities for persistently very high or low inflation using inflation options prices. We show that three new adjustments to conventional methods are crucial: inflation, horizon, and risk. We find that: (a) U.S. deflation risk in 2011–2014 has been overstated, (b) ECB unconventional policies lowered deflation disaster probabilities, (c) inflation expectations deanchored in 2021–2022, (d) reanchored as policy tightened, (e) but the 2021–2024 disaster left scars, and (f) U.S. expectations are less sensitive to inflation realizations than in the eurozone.

Keywords: option prices; inflation derivatives; Arrow-Debreu securities (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 G13 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2025-11-16
References: Add references at CitEc
Citations:

Published in Review of Financial Studies, 16, November, 2025. ISSN: 0893-9454

Downloads: (external link)
http://eprints.lse.ac.uk/127063/ Open access version. (application/pdf)

Related works:
Working Paper: How likely is an inflation disaster? (2024)
Working Paper: How likely is an inflation disaster? (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:127063

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().