Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2020 023

The common and speci fic components of infl ation expectation across European

Shi Chen
Wolfgang Karl Härdle
Weining Wang

Inflation expectation (IE) is often considered to be an important determinant of
actual inflation in modern economic theory, we are interested in investigating
the main risk factors that determine its dynamics. We fiirst apply a joint
arbitrage-free term structure model across different European countries to
obtain estimate for country-specific IE. Then we use the two-component and
three-component models to capture the main risk factors. We discover that the
extracted common trend for IE is an important driver for each country of
interest. Moreover a spatial-temporal copula model is tted to account for the
non-Gaussian dependency across countries. This paper aims to extract informative
estimates for IE and provide good implications for monetary policies.

in ation expectation; joint yield-curve modeling; factor model; common trend;
spatial-temporal copulas

JEL Classification:
C02, C13, C38, E31, E43