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Stochastic Inflation and the Term Structure of Interest Rates: a Simple Diffusion Model

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  • Cristiano Baldassari
  • Massimiliano Meschini
  • Paola Nascenzi

Abstract

The present paper addresses the problem of valuing contingent claims on the term structure in asingle good economy under uncertain inflation. In the context of arbitrage-free valuation, a simple diffusion model for pricing inflation-indexed securities is proposed. A martingale characterization of nominal and real prices is given and a stochastic generalization of the Fisher equation is provided. An example of two-factor model which can be used to value inflation-linked securities in practical applications, is also discussed. JEL classification numbers: G00, G10, G30. Keywords: Term structure of interest rates, Fisher equation, HJM-methodology, Inflation-linked securities.

Suggested Citation

  • Cristiano Baldassari & Massimiliano Meschini & Paola Nascenzi, 2024. "Stochastic Inflation and the Term Structure of Interest Rates: a Simple Diffusion Model," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 13(4), pages 1-2.
    • Handle: RePEc:spt:fininv:v:13:y:2024:i:4:f:13_4_2
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    References listed on IDEAS

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    More about this item

    Keywords

    term structure of interest rates; fisher equation; hjm-methodology; inflation-linked securities.;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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