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Inflation risk premia and risk-adjusted expectations of inflation

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  • Casiraghi, Marco
  • Miccoli, Marcello

Abstract

The rate of swap contracts linked to inflation can be a poor measure of inflation expectations, as it incorporates time-varying risk premia. By following an established approach, we estimate inflation risk premia and construct risk-adjusted measures of inflation expectations for the US and the euro area. Our results show that premia are negatively related to the business cycle and the volatility of the stock market, increase with the maturity of the contract and are on average lower in the US than in the euro area.

Suggested Citation

  • Casiraghi, Marco & Miccoli, Marcello, 2019. "Inflation risk premia and risk-adjusted expectations of inflation," Economics Letters, Elsevier, vol. 175(C), pages 36-39.
    • Handle: RePEc:eee:ecolet:v:175:y:2019:i:c:p:36-39
    DOI: 10.1016/j.econlet.2018.12.002
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    References listed on IDEAS

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    1. Alexander Kupfer, 2018. "Estimating Inflation Risk Premia Using Inflation‐Linked Bonds: A Review," Journal of Economic Surveys, Wiley Blackwell, vol. 32(5), pages 1326-1354, December.
    2. Joseph Haubrich & George Pennacchi & Peter Ritchken, 2012. "Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps," The Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1588-1629.
    3. Piazzesi, Monika & Swanson, Eric T., 2008. "Futures prices as risk-adjusted forecasts of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 677-691, May.
    4. John H. Cochrane & Monika Piazzesi, 2005. "Bond Risk Premia," American Economic Review, American Economic Association, vol. 95(1), pages 138-160, March.
    5. Andrea Berardi & Alberto Plazzi, 2019. "Inflation Risk Premia, Yield Volatility, and Macro Factors," Journal of Financial Econometrics, Oxford University Press, vol. 17(3), pages 397-431.
    6. Peter Hördahl & Oreste Tristani, 2014. "Inflation Risk Premia in the Euro Area and the United States," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 1-47, September.
    7. Refet S. Gürkaynak & Brian Sack & Jonathan H. Wright, 2010. "The TIPS Yield Curve and Inflation Compensation," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 70-92, January.
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    Cited by:

    1. Christiane Baumeister, 2021. "Measuring Market Expectations," Working Papers 202163, University of Pretoria, Department of Economics.
    2. Julie Bennett & Michael T. Owyang, 2022. "On the Relative Performance of Inflation Forecasts," Review, Federal Reserve Bank of St. Louis, vol. 104(2), pages 131-148.
    3. Angelico, Cristina & Marcucci, Juri & Miccoli, Marcello & Quarta, Filippo, 2022. "Can we measure inflation expectations using Twitter?," Journal of Econometrics, Elsevier, vol. 228(2), pages 259-277.
    4. Maryam Movahedifar & Hossein Hassani & Masoud Yarmohammadi & Mahdi Kalantari & Rangan Gupta, 2021. "A robust approach for outlier imputation: Singular Spectrum Decomposition," Working Papers 202164, University of Pretoria, Department of Economics.
    5. Sara Cecchetti & Davide Fantino & Alessandro Notarpietro & Marianna Riggi & Alex Tagliabracci & Andrea Tiseno & Roberta Zizza, 2021. "Inflation expectations in the euro area: indicators, analyses and models used at Banca d’Italia," Questioni di Economia e Finanza (Occasional Papers) 612, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Inflation swaps; Inflation expectations; Inflation risk premia;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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