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Implicit Inflation and Risk Premiums in the Brazilian Fixed Income Market

Lucas Argentieri Mariani and Márcio Laurini

Emerging Markets Finance and Trade, 2017, vol. 53, issue 8, 1836-1853

Abstract: The breakeven inflation, the differential between nominal and real yields of bonds, is often used as a predictor of future inflation. The model presented here decomposes this interest rate differential into a risk premium and implicit inflation using a parametric formulation based on no-arbitrage conditions using nominal and indexed yield curves in Brazil, via an affine model of the Nelson–Siegel family. The measures of implicit inflation obtained from the model are shown to be unbiased estimators of future inflation for short horizons and carry some information for long horizons, and the model forecasts are superior to market surveys.

Date: 2017
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/1540496X.2016.1193730

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