Inflation Risks and Inflation Risk Premia

52 Pages Posted: 5 Apr 2010

See all articles by Juan A. Garcia

Juan A. Garcia

European Central Bank (ECB)

Thomas Werner

European Central Bank (ECB)

Date Written: February 22, 2010

Abstract

This paper investigates the link between the perceived inflation risks in macroeconomic forecasts and the inflation risk premia embodied in financial instruments. We first provide some stylized facts about the term structure of inflation compensation, inflation expectations and inflation risk premia in the euro area bond market. Latent factor models like ours fit data well, but are often critisized for lacking economic interpretation. Using survey inflation risks, we show that perceived asymmetries in inflation risks help interpret the dynamics of long-term inflation risk premia, even after controlling for a large number of macro and financial factors.

Keywords: Affine term structure models, state-space modelling, inflation compensation, inflation risk premia, inflation risks

JEL Classification: G12, E31, E43

Suggested Citation

Garcia, Juan Angel and Werner, Thomas, Inflation Risks and Inflation Risk Premia (February 22, 2010). ECB Working Paper No. 1162, Available at SSRN: https://ssrn.com/abstract=1569383 or http://dx.doi.org/10.2139/ssrn.1569383

Juan Angel Garcia (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Thomas Werner

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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