Market risk and market-implied inflation expectations

Orłowski, Lucjan T.; Soper, Carolyne Cebrian

doi:10.1016/j.irfa.2019.101389

Cited by 9 publications

(5 citation statements)

References 14 publications

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“…3 On a wider note anchoring inflation expectation can also be helpful in managing market risk Orlowski & Soper (2019). In a wider context, Chortareas et al (2002) argued that the increase in monetary policy's transparency can decrease in inflation and sacrifice ratio.…”

Section: Introductionmentioning

confidence: 99%

Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms

Nasir

Huynh

Yarovaya³

2020

International Review of Financial Analysis

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Section: Introductionmentioning

confidence: 99%

Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms

Nasir

Huynh

Yarovaya³

2020

International Review of Financial Analysis

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“…Market risk proxied by the Chicago Board Options Exchange VIX volatility index jumped from an already elevated level of 19.6 in February to an extremely high level of 57.7 in March, which is just a bit shy of its highest monthly average of 62.2 at the peak of the financial crisis in November 2008. It has receded gradually to 26.8 by July, which still falls within the zone of a ‘turbulent’ market, as discussed by Orlowski and Soper (2019). Correspondingly, the equity markets experienced a rather short‐term correction.…”

Section: The Pandemic Risk and Financial Marketsmentioning

confidence: 87%

The 2020 Pandemic: Economic repercussions and policy responses

Orłowski

2020

Rev Financ Econ

Self Cite

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This paper analyses the economic and financial repercussions of the 2020 COVID‐19 pandemic. It argues that the pandemic has inflicted serious injuries to the labor force but has not damaged the physical capital stock. Therefore, the resolution policies of this crisis ought to be carefully tailored to supporting structural adjustments to the labor market. The analysis asserts that the impact of the pandemic crisis is exacerbated by the identification gap between the unobserved and the officially reported cases of COVID‐19. The gap increases financial risks, including market‐, credit‐, default‐, and foreign exchange risks.

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“…To our knowledge, no other work has been conducted to identify regimes of market participants' inflation forecasts in the Euro area, however, similar works may exist on realized inflation data at lower frequency (see Nalewaik (2015) for instance) and for implied inflation in the US (see Orlowski and Soper (2019)). To address this issue, we conduct specification tests to ensure robust parametrization (let us recall that we showed in Section 3 that the choice of a non-linear model is justified).…”

Section: Modelmentioning

confidence: 91%

“…First, we confirm the non-linear behavior of European inflation expectations and identify historical regimes using a Markov-Switching model. Even if the use of a Markov-Switching model for European implied inflation is quite new, let us mention that Orlowski and Soper (2019) use a regime-switching specification to investigate the link between US implied inflation and market risk. We show that one of the phases corresponds to a period of high uncertainty about inflation, with fast and large revisions of expectations by market participants, and coincides with a trend-reversion of realized inflation.…”

Section: Literature Reviewmentioning

confidence: 99%

Inflation Forecasts and European Asset Returns: A Regime-Switching Approach

Pesci¹,

Aguilar²,

James³

et al. 2022

JRFM

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Considering market-based inflation expectations, we show that investors’ forecasts are non-linear. We capture this non-linear behavior with a Markov-switching model that allows us to identify a regime of high uncertainty, and a regime of low uncertainty and low concern about inflation. Using a complete cross-asset panel of equity sectors, bonds, and commodities, we perform regressions in both regimes including several control variables, and show that the exposure of European assets returns to implied inflation is regime-dependent. We show that inflation-indexed government bonds and oil are the best way to get exposure to slow upward revisions of future inflation that correspond to periods of rallying inflation. We thus identify alternatives to hedge oneself against revisions in inflation forecasts when inflation is considered as a variable of interest by market participants, which, in fact, corresponds to periods of breaks in the trend of realized inflation. In particular, we provide empirical evidence that some equity sectors exhibit good inflation-hedging properties.

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Market risk and market-implied inflation expectations

Cited by 9 publications

References 14 publications

Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms

Inflation targeting & implications of oil shocks for inflation expectations in oil-importing and exporting economies: Evidence from three Nordic Kingdoms

The 2020 Pandemic: Economic repercussions and policy responses

Inflation Forecasts and European Asset Returns: A Regime-Switching Approach

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