The Eurozone (Expected) Inflation: An Option's Eyes View

46 Pages Posted: 7 Jun 2017

See all articles by Ricardo Gimeno

Ricardo Gimeno

Banco de España

Alfredo Ibañez

Comillas Pontifical University

Date Written: June 6, 2017


We estimate inflation risk-neutral densities (RNDs) in the Euro area since 2009. We use Euro inflation swaps and caps/floors options, and introduce a simple and parsimonious approach to jointly estimate the RNDs across horizons. This way, we obtain the implicit RND for forward measures, like the five-on-five years inflation rate, which, although it is not directly traded in the market, it is a key rate for monetary policy. Then, we discuss several indicators derived from the information content of the historical RNDs that are useful for monetary policy and compare them in the light of the ECB’s decisions and communication over the last few years. Specifically, the evolution of tails risks (associated with deflation and high inflation); the balance of inflation risks; measures of risk aversion from the ECB’s Survey of Professional Forecasters (SPF); and how forward inflation rates react to the ECB’s non-conventional monetary policies (Longer Term Refinancing Operations, LTRO, Securities Market Programme, SMP, Asset Purchase Programme, APP, and its variants and extensions).

Keywords: inflation compensation, inflation options, risk-neutral densities, inflation risk aversion, balance of inflation risks

JEL Classification: E31, E44, G13

Suggested Citation

Gimeno, Ricardo and Ibañez, Alfredo, The Eurozone (Expected) Inflation: An Option's Eyes View (June 6, 2017). Banco de Espana Working Paper No. 1722, Available at SSRN: or

Ricardo Gimeno (Contact Author)

Banco de España ( email )

Madrid 28014

Alfredo Ibañez

Comillas Pontifical University ( email )

Alberto Aguilera 21
Madrid, Madrid 28015

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