SFB649DP2015 049
Estimating inflation expectation co-movement across countries
Shi Chen
Wolfgang Karl Härdle
Weining Wang
Abstract:
Inflation expectation is an important indicator for policy makers and financial
investors. To capture a more accurate real-time estimate of inflation expectation on
the basis of financial markets, we propose an arbitrage-free term structure model
across different countries. We first estimate inflation expectation by modeling the
nominal and the inflation-indexed bond yields jointly for each country. The joint dynamic
model for inflation expectation is a cross sectional state space model combined
with a GeoCopula model, which accounts for the default risk and the non Gaussian
dependency structure over countries. We discover that the extracted common trend
for inflation expectation is an important driver for each country of interest. Moreover,
the model extracts informative estimates of inflation expectations and will
provide good implications for monetary policies.
Keywords:
inflation expectation, arbitrage free, yield curve modelling, inflation risk
JEL Classification:
G12, E43, E31