On Aspects of Inflation in the Context of Commodity and Futures Market

49 Pages Posted: 2 Jun 2022

See all articles by Christian Oliver Ewald

Christian Oliver Ewald

University of Glasgow; Høgskole i Innlandet

Yixiao Mao

University of Glasgow

Date Written: October 6, 2018

Abstract

In order to tackle the non-availability of inflation futures data, we introduce the futures on the CPI proxy (FCP). Compared to over-the-counter inflation-linked derivatives, the FCP is a more accessible tool for inflation forecasting. The time series of the FCP chain is analysed by a two-factor valuation model. Our model captures the downward trend of U.S. CPI inflation in 2014. Furthermore, the model-filtered spot CPI alleviates the publication lag of U.S. CPI. The uncertainty of FCP price level prediction is estimated by analysing the fan charts derived from a synthetic option implied volatility surface. Among all fan charts, the one derived from the out-of-the-money option chain yields the most certain price level forecast, although the uncertainty of the corresponding inflation forecast is higher than that of the Bank of England inflation forecast. Additionally, the negative inflation risk premium estimated from the time series of the FCP chain is consistent with post-Lehman estimates in the literature.

Keywords: Inflation, commodity markets, futures, options

JEL Classification: C22, E31, G13, G17, Q02

Suggested Citation

Ewald, Christian Oliver and Mao, Yixiao, On Aspects of Inflation in the Context of Commodity and Futures Market (October 6, 2018). Available at SSRN: https://ssrn.com/abstract=3261892 or http://dx.doi.org/10.2139/ssrn.3261892

Christian Oliver Ewald

University of Glasgow ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

Høgskole i Innlandet ( email )

Lillehammer, 2624
Norway

Yixiao Mao (Contact Author)

University of Glasgow

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