Inflation Derivatives Under Inflation Target Regimes
AbstractInflation targeting -- the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target -- has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the pricing of inflation derivatives. We develop a flexible model of inflation targeting in which the central bank's intervention to steer inflation towards the target depends on past deviations and the policymaker's ability or will to enforce the target. We use our model to price inflation derivatives and demonstrate the impact of inflation targeting on derivative pricing.
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Bibliographic InfoPaper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 43.
Length: 37 pages
Date of creation: Apr 2012
Date of revision:
Inflation derivatives; Inflation targeting; Target zones; Option pricing;
Other versions of this item:
- Mordecai Avriel & Jens Hilscher & Alon Raviv, 2013. "Inflation Derivatives Under Inflation Target Regimes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 33(10), pages 911-938, October.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-22 (All new papers)
- NEP-CBA-2012-05-22 (Central Banking)
- NEP-MAC-2012-05-22 (Macroeconomics)
- NEP-MON-2012-05-22 (Monetary Economics)
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