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Inflation Derivatives Under Inflation Target Regimes

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Author Info

  • Mordecai Avriel

    ()
    (Technion-Israel Institute of Technology)

  • Jens Hilscher

    ()
    (International Business School, Brandeis University)

  • Alon Raviv

    ()
    (International Business School, Brandeis University)

Abstract

Inflation 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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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP43.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 43.

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Length: 37 pages
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:brd:wpaper:43

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Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/
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Keywords: Inflation derivatives; Inflation targeting; Target zones; Option pricing;

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