A non-knotty inflation risk premium model

José Valentim Machado Vicente

Applied Economics, 2023, vol. 55, issue 28, 3271-3278

Abstract: In this article, I estimate the inflation risk premium (IRP) using a low-dimensional arbitrage-free dynamic model through a novel strategy. Instead of modelling the nominal and real yields jointly, I make assumptions about the short-term inflation rate. More specifically, I assume it follows a Gaussian process. This framework has a closed-form expression for IRP. Since inflation yields are not observed, to estimate the model parameters I approximate them by the break-even inflation rate. This approximation works well because the convexity correction is very small. I find that the estimated IRP is strongly correlated with those obtained using surveys or more complex models. Therefore, I provide an easier procedure to obtain IRP, avoiding the cumbersome estimation process of high-order models.

Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2022.2111023 (text/html)
Access to full text is restricted to subscribers.

Related works:
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:taf:applec:v:55:y:2023:i:28:p:3271-3278

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036846.2022.2111023

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().