Post by Sapphire Capital on Sept 2, 2008 20:58:51 GMT 4
Inflation Derivatives Under Inflation Target Regimes
Alon Raviv
Boston University - Metropolitan College (MET); Hebrew University of Jerusalem - Jerusalem School of Business Administration
Mordecai Avriel
Technion-Israel Institute of Technology - General; Bank Hapoalim - General
August 18, 2008
Abstract:
Inflation targeting as of 2007 had been adopted by more than twenty economies. The regime is characterized by an explicit quantitative inflation target where the central bank attempts to keep inflation level within fixed bounds. However, in practice inflation may deviate from its target due to the limited ability or will of the central bank to enforce it. Target regimes have a strong impact on the stochastic nature of inflation and thus on the pricing of inflation-linked derivatives. To consider this impact we develop a general and adjustable valuation model in which the intervention of the central bank, to steer actual inflation towards the target, is determined by the accumulated information about the economy's record of deviations from the target.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1232922_code342912.pdf?abstractid=1232922&mirid=2
Alon Raviv
Boston University - Metropolitan College (MET); Hebrew University of Jerusalem - Jerusalem School of Business Administration
Mordecai Avriel
Technion-Israel Institute of Technology - General; Bank Hapoalim - General
August 18, 2008
Abstract:
Inflation targeting as of 2007 had been adopted by more than twenty economies. The regime is characterized by an explicit quantitative inflation target where the central bank attempts to keep inflation level within fixed bounds. However, in practice inflation may deviate from its target due to the limited ability or will of the central bank to enforce it. Target regimes have a strong impact on the stochastic nature of inflation and thus on the pricing of inflation-linked derivatives. To consider this impact we develop a general and adjustable valuation model in which the intervention of the central bank, to steer actual inflation towards the target, is determined by the accumulated information about the economy's record of deviations from the target.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1232922_code342912.pdf?abstractid=1232922&mirid=2