Can Risk Models Extract Inflation Expectations from Financial Market Data? Evidence from the Inflation Protected Securities of Six Countries
Daniel Tortorice () and
Arben Kita ()
Additional contact information
Arben Kita: Highfield Campus, University of Southampton
No 1801, Working Papers from College of the Holy Cross, Department of Economics
We consider an arbitrage strategy which exactly replicates the cash of of a sovereign inflation-indexed bond using infation swaps and nominal sovereign bonds. The strategy reveals a violation of the law of one price in the G7 countries which is largest for the eurozone. Testing the strategy's exposure to deflation, volatility, liquidity, economic and policy risks suggests that the observed pricing differential is an economic tail risk premium which is more pronounced in the eurozone. We conclude that ination expec- tations implied by models that view this pricing differential as compensation for risk are likely to be accurate and useful for policy-making.
Keywords: Inflation-Indexed Bonds; Nominal Bonds; Law of One Price; Mispricing; Limits to Arbitrage (search for similar items in EconPapers)
JEL-codes: G12 G15 G18 H63 (search for similar items in EconPapers)
Pages: 35 pages
New Economics Papers: this item is included in nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:hcx:wpaper:1801
Access Statistics for this paper
More papers in Working Papers from College of the Holy Cross, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Victor Matheson ().