Affine Model of Inflation-Indexed Derivatives and Inflation Risk Premium

51 Pages Posted: 18 Oct 2011 Last revised: 12 Nov 2012

See all articles by Hsiao-Wei Ho

Hsiao-Wei Ho

Shih Chien University

Henry Hongren Huang

National Central University at Taiwan

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: October 18, 2011

Abstract

This paper proposes an affine-based approach which jointly captures the nominal interest rate, the real interest rate, and the inflation risk premium to price inflation-indexed derivatives, including zero-coupon inflation-indexed swaps, year-on-year inflation-indexed swaps, inflation-indexed swaptions, and inflation-indexed caps and floors. We provide an example and explain how to use traded zero-coupon inflation-indexed swap rates to estimate inflation risk premiums.

Keywords: inflation-indexed derivatives, inflation risk premium

JEL Classification: C15, G13

Suggested Citation

Ho, Hsiao-Wei and Huang, Henry Hongren and Yildirim, Yildiray, Affine Model of Inflation-Indexed Derivatives and Inflation Risk Premium (October 18, 2011). Available at SSRN: https://ssrn.com/abstract=1945575 or http://dx.doi.org/10.2139/ssrn.1945575

Hsiao-Wei Ho

Shih Chien University ( email )

200 University Road
Ney-Nan Tsun
Kaohsiung, 845
Taiwan

Henry Hongren Huang

National Central University at Taiwan ( email )

No. 300, Zhongda Road
Chung-Li Taiwan, 32054
Taiwan

Yildiray Yildirim (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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