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Real Term Structure and Inflation Compensation in the Euro Area

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  • Marcello Pericoli

    (Bank of Italy)

Abstract

This paper estimates the term structure of zero-coupon real interest rates for the euro area implied by French indexlinked bonds with a smoothing spline methodology, which is very effective in capturing the general shape of the real term structure, while smoothing through idiosyncratic variations in the yields. A comparison shows that the chosen spline outperforms other methodologies commonly used in the literature across several dimensions. The paper also estimates a liquidity-adjusted nominal term structure to compute the constant-maturity inflation compensation. This compensation is compared with the surveyed inflation expectation in order to obtain a measure of the inflation risk premium in the euro area during the last decade.

Suggested Citation

  • Marcello Pericoli, 2014. "Real Term Structure and Inflation Compensation in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 1-42, March.
    • Handle: RePEc:ijc:ijcjou:y:2014:q:1:a:1
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    Citations

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    Cited by:

    1. Marcello Pericoli, 2012. "Expected inflation and inflation risk premium in the euro area and in the United States," Temi di discussione (Economic working papers) 842, Bank of Italy, Economic Research and International Relations Area.
    2. Covarrubias, Enrique & Hernández-del-Valle, Gerardo, 2016. "Inflation expectations derived from a portfolio model," MPRA Paper 69489, University Library of Munich, Germany.
    3. Gabriele Zinna, 2016. "Price Pressures on UK Real Rates: An Empirical Investigation," Review of Finance, European Finance Association, vol. 20(4), pages 1587-1630.
    4. Marcello Pericoli, 2019. "An assessment of recent trends in market-based expected iflation in the euro area," Questioni di Economia e Finanza (Occasional Papers) 542, Bank of Italy, Economic Research and International Relations Area.
    5. Béatrice Séverac & José S. Fonseca, 2021. "Relative pricing of French Treasury inflation-linked and nominal bonds: an empirical approach using arbitrage strategies," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 20(3), pages 273-295, September.
    6. Alberto Di Iorio & Marco Fanari, 2020. "Break-even inflation rates: the Italian case," Questioni di Economia e Finanza (Occasional Papers) 578, Bank of Italy, Economic Research and International Relations Area.
    7. Sara Cecchetti & Adriana Grasso & Marcello Pericoli, 2022. "An analysis of objective inflation expectations and inflation risk premia," Temi di discussione (Economic working papers) 1380, Bank of Italy, Economic Research and International Relations Area.
    8. Gabriele Zinna, 2014. "Price pressures in the UK index-linked market: an empirical investigation," Temi di discussione (Economic working papers) 968, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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