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Gerzensee, February 2018

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 DAY 1SLIDES DAY 2 ,  programme in EVIEWS for data import and transformation

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

Asset Pricing with Time-Varying Expected Returns

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 ,
Grothe M. and A.Meyler(2014) Inflation Forecasts: are Market based and Survey Based measures informative? 
Elton E.J.(1999) "Expected return, realized return and asset pricing tests", Journal of Finance 

An introduction to time-series based forecasting

2. Measuring Market Inflation Expectations

Bond Market “break-even” inflation rates
Inflation Swap Rates

Devlin W. and D. Patwardhan(2012) “Measuring Market Inflation Expectations” available at 
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
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() “Phillips curve Inflation Forecasting”

3.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
Ad Hoc 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


4.Assessing the Importance of the Risk Premium

Single equation evidence
VAR-based evidence

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
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
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"

Breakeven Inflation and Inflation risk premia data and programs


5.No-Arbitrage Models of the Term Structure

Affine Term Structure Models

MATLAB Programmes and data for the analysis of Affine TS 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∼aa610
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 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


Last update 13/02/2018

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