MARKET BASED INFLATION FORECASTS
MARKET BASED INFLATION FORECASTS
Gerzensee, February 2024
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 R will allow the participants to apply the methodology illustrated in the lectures on data.
SLIDES
LECTURES DAY 1, LECTURES DAY 2
DATA AND CODES
DATABASE IN EXCEL (zipped file)
AN INTRODUCTION TO FORECASTING INFLATION AND INTEREST RATES WITH R
EXERCISE 1, PROPOSED SOLUTION, AN R CODE TO IMPLEMENT THE SOLUTION
DATA AND R CODES FOR THE IMPLEMENTATION OF the ACM Affine Term Structure Model
DATA AND R CODES FOR THE IMPLEMENTATION OF the FF Affine Term Structure Model with trends and cycles
SYLLABUS
1. Time-Series Based,Survey Based, Big-Data 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
Bernanke B., O.Blanchard(2023), What Caused the U.S. Pandemic-Era Inflation?
Clathworthy, Peel and Pope(2005) “Are Analysts Loss functions asymmetric?”
Cavallo A. and R.Rigobon(2016) "The Billion Prices Project: Using Online Prices for Measurement and Research", Journal of Economic Perspectives,30,2,151-178
www.thebillionpricesproject.com, www.trueflation.com
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 14322Blanchard 0. and Bernanke B.(2023) "What Caused the U.S. Pandemic-Era Inflation?"
3. Market-based Forecasts of Inflation:The Basics
Asset Prices with Time-Varying Expected Returns
Physical and Risk-Neutral probabilities
Bond Returns, YTM and Risk Premia
Modelling the Term Structure and Inflation
Campbell J.Y(2017) Financial Decisions and Markets, Chapter 8
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,
Favero, Carlo A, Alessandro Melone, and Andrea Tamoni (2022) “Monetary policy and bond prices with drifting equilibrium rates,” Journal of Financial and Quantitative Analysis, 1–26
4. Factor Models of the Term Structure and the Risk Premium
A general State-Space Representation
Interpolated Factor Model of the Term Structure
Affine Term Structure Models
Affine term Structure Models with trend in Yields and Cycles in Excess Returns
Adrian, Tobias, Richard K Crump, and E.Moench (2013) “Pricing the term structure with linear regressions,” Journal of Financial Economics, 110 (1), 110–138.
Adrian, Tobias, Richard K Crump, and E. Moench (2015) “Regression-based estimation of dynamic asset pricing models,” Journal of Financial Economics, 118 (2), 211–244
Adrian T and H.Wu (2009) The Term Structure of Inflation Expectations. Working paper, Federal Reserve Bank of New York
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
Bauer, Michael D. and Glenn D. Rudebusch (2020) "Interest Rates under Falling Stars", American Economic Review, Vol. 110, No. 5, pp. 1316-54.
Diebold and Li (2005) "Forecasting the Term Structure of Government Bond Yields", Journal of Econometrics
Favero C.A. and R. Fernandez-Fuertes(2023) Modelling the Term Structure with Trends in Yields and Cycles in Excess Returns
Garcia A. and Werner T.(2010) Inflation risk and Inflation Risk Premia, ECB Working Paper 1162
Gürkaynak, RS, B Sack, and JH Wright. 2006, The US Treasury Yield Curve
Nelson C.R. and A.F. Siegel (1987) "Parsimonious modelling of yield curves", Journal of Business, 60, 473-489
5. Market-based Forecasts of Inflation:The Instruments
Inflation indexed bonds
Inflation Swaps
The Option-Implied distribution of future inflation
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
Haubrich, Joseph G., George Pennacchi, and Peter Ritchken. 2011. “Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps.” Federal Reserve Bank of Cleveland, Working Paper No. 11-07. https://doi.org/10.26509/frbc-wp-201107
Hurd and Rellen(2006) “New Information from Inflation Swaps and Index-Linked Bonds” Bank of England Quarterly Bulletin
Kitsul Y. and JH Wright(2012) The Economics of Options-Implied Inflation Probability Density Functions, NBER WP 18195
6.Risk Premia and the Inflation Risk Premium
The risk premia in nominal bonds, real bonds and break-even inflation rates
Campbell J.Y(2017) Financial Decisions and Markets, Chapter 8
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"
Gürkaynak, RS, B Sack, and JH Wright. 2010. The TIPS Yield Curve and Inflation Compensation. American Economic Journal: Macroeconomics 2(1):70—92
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"
Last change 07/02/2024