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The eurozone (expected) inflation: An option's eyes view

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  • Gimeno, Ricardo
  • Ibáñez, Alfredo

Abstract

We estimate inflation risk-neutral densities (RNDs) in the euro area, using inflation swaps and caps/floors options, and introduce a parsimonious approach to jointly estimate the RNDs across horizons. Thus, we obtain daily implicit RNDs for forward measures, such as the 5-year-on-5-year inflation rate, which, although not directly traded in the market, is a key reference for monetary policy. Then, we discuss several indicators derived from the information content of those historical RNDs that are relevant for policy makers, and compare them in light of the ECB's decisions and communication since 2009. Specifically, we study the evolution of tail risks (associated with deflation and high inflation), the balance of inflation risks, risk aversion, and how forward inflation rates react to the ECB's non-conventional monetary policies (Longer Term Refinancing Operations, LTRO; Securities Market Programme, SMP; Asset Purchase Programme, APP; and its variants and extensions).

Suggested Citation

  • Gimeno, Ricardo & Ibáñez, Alfredo, 2018. "The eurozone (expected) inflation: An option's eyes view," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 70-92.
    • Handle: RePEc:eee:jimfin:v:86:y:2018:i:c:p:70-92
    DOI: 10.1016/j.jimonfin.2018.03.018
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    Cited by:

    1. Chipeniuk, Karsten O. & Walker, Todd B., 2021. "Forward inflation expectations: Evidence from inflation caps and floors," Journal of Macroeconomics, Elsevier, vol. 70(C).
    2. Juan Angel Garcia & Aubrey Poon, 2018. "Trend Inflation and Inflation Compensation," IMF Working Papers 2018/154, International Monetary Fund.
    3. Gimeno, Ricardo & Ibáñez, Alfredo, 2018. "The eurozone (expected) inflation: An option's eyes view," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 70-92.
    4. Ciccarelli, Matteo & Osbat, Chiara, 2017. "Low inflation in the euro area: Causes and consequences," Occasional Paper Series 181, European Central Bank.
    5. Carlos Pérez Montes & Jorge E. Galán & María Bru & Julio Gálvez & Alberto García & Carlos González & Samuel Hurtado & Nadia Lavín & Eduardo Pérez Asenjo & Irene Roibás, 2023. "Systemic analysis framework for the impact of economic and financial risks," Occasional Papers 2311, Banco de España.
    6. Ciccarelli, Matteo & García, Juan Angel, 2015. "International spillovers in inflation expectations," Working Paper Series 1857, European Central Bank.
    7. Chibane, Messaoud & Kuhanathan, Ano, 2023. "Is the fed failing to re-anchor expectations? An analysis of jumps in inflation swaps," Finance Research Letters, Elsevier, vol. 55(PB).

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    More about this item

    Keywords

    Inflation compensation; Inflation options; Risk-neutral densities; Inflation risk aversion; Balance of inflation risks;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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