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MARKET BASED INFLATION FORECASTS


MARKET BASED INFLATION FORECASTS

Gerzensee, February 2020

The objective of this section of the course is to provide an understanding of market-based inflation expectations by analyzing their meaning their properties and their construction.  Empirical sections in EVIEWS and MATLAB will allow the participants to apply the methodology illustrated in the lectures on US and euro area data.

SLIDES SECTION 1-4, SLIDES SECTION 5, DATABASE IN EXCEL and an EVIEWS PROGRAMME FOR DATA IMPORT AND TRANSFORMATION 

1. The Object to our interest and the database
Introduction to the database for the course that uses data at different frequencies from different sources 

2. Time-Series Based,Survey Based, and Asset Prices based Forecasts of Inflation

Ang, A., G. Bekaert, and M. Wei (2007): “Do macro variables, asset markets or surveys forecast inflation better?,” Journal of Monetary Economics, 54, 11631212
Clathworthy, Peel and Pope(2005) “Are Analysts Loss functions asymmetric?”
Diebold Francis (2015) Forecasting , http://www.ssc.upenn.edu/~fdiebold/Textbooks.html
Grothe M. and A.Meyler(2014) Inflation Forecasts: are Market based and Survey Based measures informative? 
ECB Economic Bullettin(2018) Interpreting Recent Developments in Market Based Indicators of Longer Term Inflation Expectations 
Elton E.J.(1999) "Expected return, realized return and asset pricing tests", Journal of Finance 
Stock M. and J.Watson(2003) Forecasting Output and Inflation:The Role of Asset Prices, Journal of Economic Literature, 41, 788-829
Stock M. and J.Watson(2008) “Phillips curve Inflation Forecasts” NBER WP 14322

3. Market-based Instruments to Forecast Inflation 

Bond Market “break-even” inflation rates
Inflation Swap Rates
The Distribution of market-based inflation expectations
Physical and Risk.Neutral probabilities 

Devlin W. and D. Patwardhan(2012) “Measuring Market Inflation Expectations” available at http://www.treasury.gov.au/PublicationsAndMedia/Publications/2012/EconomicRoundupIssue2/Report/Measuringmarketinflationexpectations 
ECB Economic Bullettin(2018) Interpreting Recent Developments in Market Based Indicators of Longer Term Inflation Expectations
Gürkaynak, RS, B Sack, and JH Wright. 2010. The TIPS Yield Curve and Inflation Compensation. American Economic Journal: Macroeconomics 2(1):70—92
Hurd and Rellen(2006) “New Information from Inflation Swaps and Index-Linked Bonds” Bank of England Quarterly Bulletin
 

4.Bond Returns: Yield to Maturity, Duration and Holding Period Returns

Zero-Coupon Bonds
A Simple Model for the term structure
Forward Rates  and Instantaneous Forward Rates
Financial Factor Models of the Term Structure

Campbell J.Y(2017) Financial Decisions and Markets, Chapter 8
Diebold and Li (2005) "Forecasting the Term Structure of Government Bond Yields",  Journal of Econometrics
Gürkaynak, RS, B Sack, and JH Wright. 2006, The US Treasury Yield Curve
Adrian T and HZWu. 2009. The Term Structure of Inflation Expectations. Working paper, Federal Reserve Bank of New York
Nelson C.R. and A.F. Siegel (1987) "Parsimonious modelling of yield curves", Journal of Business, 60, 473-489

NELSON and SIEGEL MODELS in EVIEWS 
EXERCISE 1, ILLUSTRATIVE PROGRAMMES

5. The Risk Premium: Assessing its importance and measuring it 

Single equation evidence
The risk premia in nominal bonds, real bonds and break-even inflation rates 
VAR-based evidence
Affine Term Structure Models

Ang A. and M.Piazzesi(2003) "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables", Journal of Monetary Economics, 50, 745-787
Ang A., Piazzesi M. and M.Wei(2003) "What does the yield curve tell us about GDP growth?" paper available from http://www.columbia.edu/∼aa610
Campbell J.Y(2017) Financial Decisions and Markets, Chapter 8  Princeton University Press: Princeton
Campbell,J.,and Shiller,R. "Cointegration and Tests of Present Value Models" J.P.E. 95 (1987) 1062-1088
Chen R.R. and L. Scott, (1993) "Maximum Likelihood estimation for a multi-facor equilibrium model of the term structure of interest rates"Journal of Fixed Income, 3, 14-31.
Cochrane, JH. 2005. Asset Pricing, revised ed. Princeton University Press, Princeton,
Cochrane, JH and M Piazzesi. 2005. Bond Risk Premia. American Economic Review 95, 138—160
Cochrane J. and M.Piazzesi(2008) "Decomposing the Yield Curve"
Garcia A. and Werner T.(2010) Inflation risk and Inflation Risk Premia, ECB Working Paper 1162
Ireland P.(2015) “Bond Risk Premia, Monetary Policy and the Economy” mimeo
Pflueger C.E. and L.Viceira “Inflation Indexed Bonds and the Expectations Hypothesis”
Pflueger C.E. and L.Viceira "Return Predictability in The Treasury Market: Real Rates, Inflation and Liquidity"

EXERCISE 2 , data and sample programmes, proposed solution 

MATLAB Programmes and data for the analysis of Affine TS models

 

 

Last update 02/01/2020



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