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Affine model of inflation-indexed derivatives and inflation risk premium

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  • Ho, Hsiao-Wei
  • Huang, Henry H.
  • Yildirim, Yildiray
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    Abstract

    This paper proposes an affine-based approach which jointly captures the nominal interest rate, the real interest rate, and the inflation risk premium to price inflation-indexed derivatives, including zero-coupon inflation-indexed swaps, year-on-year inflation-indexed swaps, inflation-indexed swaptions, and inflation-indexed caps and floors. We provide an example and explain how to use traded zero-coupon inflation-indexed swap rates to estimate inflation risk premiums.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 235 (2014)
    Issue (Month): 1 ()
    Pages: 159-169

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    Handle: RePEc:eee:ejores:v:235:y:2014:i:1:p:159-169

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    Web page: http://www.elsevier.com/locate/eor

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    Keywords: Inflation-indexed derivatives; Inflation risk premium; Affine models;

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