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Inflation Derivatives Under Inflation Target Regimes

Author

Listed:
  • Mordecai Avriel

    (Technion-Israel Institute of Technology)

  • Jens Hilscher

    (International Business School, Brandeis University)

  • Alon Raviv

    (International Business School, Brandeis University)

Abstract

Inflation targeting -- the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target -- has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the pricing of inflation derivatives. We develop a flexible model of inflation targeting in which the central bank's intervention to steer inflation towards the target depends on past deviations and the policymaker's ability or will to enforce the target. We use our model to price inflation derivatives and demonstrate the impact of inflation targeting on derivative pricing.

Suggested Citation

  • Mordecai Avriel & Jens Hilscher & Alon Raviv, 2012. "Inflation Derivatives Under Inflation Target Regimes," Working Papers 43, Brandeis University, Department of Economics and International Business School.
    • Handle: RePEc:brd:wpaper:43
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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP43.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation derivatives; Inflation targeting; Target zones; Option pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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