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Affine model of inflation-indexed derivatives and inflation risk premium

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  • Ho, Hsiao-Wei
  • Huang, Henry H.
  • Yildirim, Yildiray

Abstract

This paper proposes an affine-based approach which jointly captures the nominal interest rate, the real interest rate, and the inflation risk premium to price inflation-indexed derivatives, including zero-coupon inflation-indexed swaps, year-on-year inflation-indexed swaps, inflation-indexed swaptions, and inflation-indexed caps and floors. We provide an example and explain how to use traded zero-coupon inflation-indexed swap rates to estimate inflation risk premiums.

Suggested Citation

  • Ho, Hsiao-Wei & Huang, Henry H. & Yildirim, Yildiray, 2014. "Affine model of inflation-indexed derivatives and inflation risk premium," European Journal of Operational Research, Elsevier, vol. 235(1), pages 159-169.
    • Handle: RePEc:eee:ejores:v:235:y:2014:i:1:p:159-169
    DOI: 10.1016/j.ejor.2013.12.010
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    2. F. Antonacci & C. Costantini & F. D'Ippoliti & M. Papi, 2020. "Inflation, ECB and short-term interest rates: A new model, with calibration to market data," Papers 2010.05462, arXiv.org.

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