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Implicit Inflation and Risk Premiums in the Brazilian Fixed Income Market

Author

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  • Lucas Argentieri Mariani
  • Márcio Poletti Laurini

Abstract

The breakeven inflation, the differential between nominal and real yields of bonds, is often used as a predictor of future inflation. The model presented here decomposes this interest rate differential into a risk premium and implicit inflation using a parametric formulation based on no-arbitrage conditions using nominal and indexed yield curves in Brazil, via an affine model of the Nelson–Siegel family. The measures of implicit inflation obtained from the model are shown to be unbiased estimators of future inflation for short horizons and carry some information for long horizons, and the model forecasts are superior to market surveys.

Suggested Citation

  • Lucas Argentieri Mariani & Márcio Poletti Laurini, 2017. "Implicit Inflation and Risk Premiums in the Brazilian Fixed Income Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(8), pages 1836-1853, August.
    • Handle: RePEc:mes:emfitr:v:53:y:2017:i:8:p:1836-1853
    DOI: 10.1080/1540496X.2016.1193730
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    Cited by:

    1. Samargandi, Nahla & Kutan, Ali M. & Sohag, Kazi & Alqahtani, Faisal, 2020. "Equity market and money supply spillovers and economic growth in BRICS economies: A global vector autoregressive approach," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    2. Helder Ferreira de Mendonça & Pedro Mendes Garcia & José Valentim Machado Vicente, 2021. "Rationality and anchoring of inflation expectations: An assessment from survey‐based and market‐based measures," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(6), pages 1027-1053, September.

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