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Extracting inflation risk premium from nominal and real bonds using survey information

Author

Listed:
  • José Vicente
  • Daniela Kubudi

Abstract

Purpose - The purpose of this paper is to forecast future inflation using a joint model of the nominal and real yield curves estimated with survey data. The model is arbitrage free and embodies incompleteness between the nominal and real bond markets. Design/methodology/approach - The methodology is based on the affine class of term structure of interest rate. The model is estimated using the Kalman filter technique. Findings - The authors show that the inclusion of survey data in the estimation procedure improves significantly the inflation forecasting. Moreover, the authors find that the monetary policy has significant effects on the inflation expectation and risk premium. Originality/value - This paper is the first to estimate inflation using a joint model of nominal and real yield curves with Brazilian data. Moreover, the authors propose a simple arbitrage-free model that takes it account incompleteness between the nominal and real bond markets.

Suggested Citation

  • José Vicente & Daniela Kubudi, 2018. "Extracting inflation risk premium from nominal and real bonds using survey information," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 45(2), pages 307-325, May.
    • Handle: RePEc:eme:jespps:jes-03-2017-0066
    DOI: 10.1108/JES-03-2017-0066
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    Citations

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    Cited by:

    1. Nikolay Iskrev & Pedro Pires Ribeiro & Sandra Gomes, 2021. "Euro area inflation expectations during the COVID-19 pandemic," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    2. Basse, Tobias & Wegener, Christoph, 2022. "Inflation expectations: Australian consumer survey data versus the bond market," Journal of Economic Behavior & Organization, Elsevier, vol. 203(C), pages 416-430.
    3. José Valentim Machado Vicente, 2021. "A Non-Knotty Inflation Risk Premium Model," Working Papers Series 543, Central Bank of Brazil, Research Department.
    4. Helder Ferreira de Mendonça & Pedro Mendes Garcia, 2021. "Does the central banker type affect inflation expectations?," Economics Bulletin, AccessEcon, vol. 41(1), pages 93-102.
    5. 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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