Forecasts of Inflation and Interest Rates in No-Arbitrage Affine Models

44 Pages Posted: 10 Feb 2016 Last revised: 30 Aug 2017

See all articles by Nikolay Gospodinov

Nikolay Gospodinov

Federal Reserve Bank of Atlanta

Bin Wei

Federal Reserve Bank of Atlanta

Date Written: 2016-02-01

Abstract

In this paper, we examine the forecasting ability of an affine term structure framework that jointly models the markets for Treasuries, inflation-protected securities, inflation derivatives, and oil future prices based on no-arbitrage restrictions across these markets. On the methodological side, we propose a novel way of incorporating information from these markets into an affine model. On the empirical side, two main findings emerge from our analysis. First, incorporating information from inflation options can often produce more accurate inflation forecasts than those based on the Survey of Professional Forecasters. Second, incorporating oil futures tends to improve short-term inflation and longer-term nominal yield forecasts.

Keywords: bond prices, TIPS, inflation derivatives, oil prices, no-arbitrage, affine models, out-of-sample forecasting

JEL Classification: C32, E43, E44, G12

Suggested Citation

Gospodinov, Nikolay and Wei, Bin, Forecasts of Inflation and Interest Rates in No-Arbitrage Affine Models (2016-02-01). FRB Atlanta Working Paper No. 2016-3. Available at SSRN: https://ssrn.com/abstract=2730478

Nikolay Gospodinov

Federal Reserve Bank of Atlanta ( email )

Atlanta, GA 30309
United States

HOME PAGE: https://www.frbatlanta.org/research/economists/gospodinov-nikolay.aspx?panel=1

Bin Wei (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/wei-bin.aspx

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