Title: Risk-adjusted expectations of inflation
Authors: Marco Casiraghi - Banca d Italia (Italy)
Marcello Miccoli - Banca d\'Italia (Italy) [presenting]
Abstract: A new way is proposed to compute market-based risk-adjusted measures of inflation expectations. We focus on rates of inflation swap contracts, a financial contract widely used to hedge inflation and the paramount proxy of market-based inflation expectations used by central banks. Borrowing from the finance literature, we study the ex-post excess return on inflation swap contracts (the difference between the swap rate at a given maturity and the realized inflation rate over the same horizon) which is an unbiased proxy of risk premia under the rational expectations hypothesis. Using data from the euro area and the US, preliminary analysis shows that the risk premia on inflation swap rates at short-to-medium maturities can be predicted by macroeconomic and financial variables that are present in agents information set at the time the contract is signed. The estimated risk premia are increasing in economic activity and decreasing in financial market volatility. This econometric analysis is then used to construct a measure of risk-adjusted inflation expectations so as to assess the role of risk premia in determining inflation swap rates.