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Inflation expectations and risk premia in emerging bond markets: Evidence from Mexico

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  • Beauregard, Remy
  • Christensen, Jens H.E.
  • Fischer, Eric
  • Zhu, Simon

Abstract

To study inflation expectations and associated risk premia in emerging bond markets, we provide estimates for Mexico based on an arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for their liquidity risk. Beyond documenting the existence of large and weakly correlated liquidity premia in nominal and real bond prices, our results indicate that long-term inflation expectations in Mexico are well anchored close to the Bank of Mexico’s inflation target. Furthermore, Mexican inflation risk premia are larger and more volatile than those in Canada and the United States.

Suggested Citation

  • Beauregard, Remy & Christensen, Jens H.E. & Fischer, Eric & Zhu, Simon, 2024. "Inflation expectations and risk premia in emerging bond markets: Evidence from Mexico," Journal of International Economics, Elsevier, vol. 151(C).
  • Handle: RePEc:eee:inecon:v:151:y:2024:i:c:s0022199624000886
    DOI: 10.1016/j.jinteco.2024.103961
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    More about this item

    Keywords

    Term structure modeling; Liquidity risk; Financial market frictions; Central bank credibility;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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