How do zero-coupon inflation swaps predict inflation rates in the euro area? Evidence of efficiency and accuracy on 1-year contracts

Ribeiro, Pedro Pires; Curto, José Dias

doi:10.1007/s00181-017-1268-8

Cited by 3 publications

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“…Research on inflation-linked securities has also sprouted in other related dimensions. One of the fields of the literature is dedicated to breaking down ILS and BEIR into 'true' inflation expectations and risk premia (see e.g., Christensen et al 2010;Haubrich et al 2012;Hördahl andTristani 2014 or Ribeiro andCurto 2018). Indeed, without any adjustment, the straightforward reading of these measures reflects the inflation compensation demanded by economic agents for taking on inflation risk, which includes 'genuine' inflation expectations as well as risk premia (namely, inflation and liquidity premia, among others).…”

Section: Literature Reviewmentioning

confidence: 99%

Changes in inflation compensation and oil prices: short-term and long-term dynamics

2021

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This paper investigates the relationship between changes in euro area short-term and long-term market-based inflation expectations from January 2005 to September 2018, also devoting special attention to the relevance of the oil market. The full sample is split into three subsets related to different economic and financial landscapes. To model the conditional mean and the variance-covariance structure, a VAR-CCC-GARCH specification with oil effects in the volatility proves to be a preferable approach compared to other multivariate GARCH models. In general, the conditional correlation between changes in short-term and long-term inflation compensation appears as constant and relatively low in each subset, though increasing since mid-2014. Furthermore, there are no signs of fundamental deviations in how changes in short-term inflation expectations affect changes in longer-term expectations and vice versa. There is evidence that changes in short-term inflation expectations tend to respond to the movements of oil prices over time, while changes in longer-term ones started responding to crude dynamics after mid-2008. On the whole, these findings are relevant for analysts, investors and especially for the policymakers who charged with ensuring price stability.

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