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Inflation expectations derived from a portfolio model

Author

Listed:
  • Covarrubias, Enrique
  • Hernández-del-Valle, Gerardo

Abstract

This paper proposes a new methodology for extracting inflation expectations from financial markets. For this purpose, a synthetic financial asset is built whose returns are matched with the inflation rate by construction. The methodology estimates the implicit return expected by the market on this asset through a portfolio valuation approach; in other words, implicit inflation expectations are obtained. This approach clarifies the mechanisms behind a negative risk premium: an inflation-linked bond is attractive to an investor when high inflation is expected or when generalized low returns are observed; in both cases, a yield below expected returns is observed.

Suggested Citation

  • Covarrubias, Enrique & Hernández-del-Valle, Gerardo, 2016. "Inflation expectations derived from a portfolio model," MPRA Paper 69489, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:69489
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    File URL: https://mpra.ub.uni-muenchen.de/69489/1/MPRA_paper_69489.pdf
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    References listed on IDEAS

    as
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    27. repec:dau:papers:123456789/7741 is not listed on IDEAS
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Inflation expectations; bond markets; breakeven.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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