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Inflation expectation and implicit inflation: does market research provide accurate measures?

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Author Info

  • Flávio de Freitas Val

    (Central Bank)

  • Claudio Henrique da Silveira Barbedo

    (IBMEC)

  • Marcelo Verdini Maia

    (IAG/PUC-RIO)

Registered author(s):

    Abstract

    In recent years bonds indexed to inflation rates have experienced a tremendous growth in trading volumes. These securities have become an important tool for the diversification of investors' portfolios, to liability management and especially to gauge the expectations of monetary authorities. In this environment, this study contributes as it presents an amended methodology to estimate the inflation risk premium and in applying different methodologies in the Brazilian market. The results indicate that implicit inflation measures with or without adjustment of the inflation risk premium return the smallest forecast errors in relation to the IPCA of measurement period.

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    Bibliographic Info

    Article provided by Fucape Business School in its journal Brazilian Business Review.

    Volume (Year): 8 (2011)
    Issue (Month): 3 (July)
    Pages: 83-100

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    Handle: RePEc:bbz:fcpbbr:v:8:y:2011:i:3:p:83-100

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    Postal: Fucape Business School Brazilian Business Review Av. Fernando Ferrari, 1358, Boa Vista CEP 29075-505 Vitória-ES
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    Related research

    Keywords: Term structure; inflation expectations; inflation risk premium.;

    References

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    1. Caio Almeida & Romeu Gomes & André Leite & José Vicente, 2007. "Does Curvature Enhance Forecasting?," Working Papers Series 155, Central Bank of Brazil, Research Department.
    2. Felipe Pinheiro & Caio Almeida & José Vicente, 2007. "Um Modelo de Fatores Latentes com Variáveis Macroeconômicas para a Curva de Cupom Cambial," Working Papers Series 148, Central Bank of Brazil, Research Department.
    3. Woodward, G Thomas, 1990. "The Real Thing: A Dynamic Profile of the Term Structure of Real Interest Rates and Inflation Expectations in the United Kingdom, 1982-89," The Journal of Business, University of Chicago Press, vol. 63(3), pages 373-98, July.
    4. J. Benson Durham, 2006. "An estimate of the inflation risk premium using a three-factor affine term structure model," Finance and Economics Discussion Series 2006-42, Board of Governors of the Federal Reserve System (U.S.).
    5. Marcos S. Matsumura & Ajax R. B. Moreira, 2006. "Macro Factors and the Brazilian Yield Curve With no Arbitrage Models," Discussion Papers 1210, Instituto de Pesquisa Econômica Aplicada - IPEA.
    6. Christensen, Ian & Frédéric Dion & Christopher Reid, 2004. "Real Return Bonds, Inflation Expectations, and the Break-Even Inflation Rate," Working Papers 04-43, Bank of Canada.
    7. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2010. "Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 143-178, 09.
    8. Francis Breedon & Jag Chadha, 1997. "The Information Content of the Inflation Term Structure," Bank of England working papers 75, Bank of England.
    9. Alexandre Lowenkron & Marcio Gomes Pinto Garcia, 2007. "Monetary policy credibility and inflation risk premium: a model with application to Brazilian data," Textos para discussão 543, Department of Economics PUC-Rio (Brazil).
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