Affine model of inflation-indexed derivatives and inflation risk premium |
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| Authors: | Hsiao-Wei Ho Henry H Huang Yildiray Yildirim |
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| Institution: | 1. Department of Finance and Banking, Shih Chien University, No. 70, Ta-Chih Street, Chung-Shan District, Taipei, Taiwan, ROC;2. Department of Finance, National Central University, No. 300, Jung-da Rd., Jung-Li 320, Taiwan, ROC;3. Whitman School of Management, Syracuse University, 721 University Ave Suite 600, Syracuse, NY 13244, United States |
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| Abstract: | This paper proposes an affine-based approach which jointly captures the nominal interest rate, the real interest rate, and the inflation risk premium to price inflation-indexed derivatives, including zero-coupon inflation-indexed swaps, year-on-year inflation-indexed swaps, inflation-indexed swaptions, and inflation-indexed caps and floors. We provide an example and explain how to use traded zero-coupon inflation-indexed swap rates to estimate inflation risk premiums. |
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| Keywords: | Inflation-indexed derivatives Inflation risk premium Affine models |
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