Rational Models for Inflation-Linked Derivatives
We construct models for the pricing and risk management of inflation-linked derivatives. The models are rational in the sense that linear payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a multiplicative manner that allows for closed-form pricing of vanilla inflation products suchlike zero-coupon swaps, year-on-year swaps, caps and floors, and the exotic limited-price-index swap. We study the conditions necessary for the multiplicative nominal pricing kernel to give rise to short rate models for the nominal interest rate process. The proposed class of pricing kernel models retains the attractive features of a nominal multi-curve interest rate model, such as closed-form pricing of nominal swaptions, and it isolates the so-called inflation convexity-adjustment term arising from the covariance between the underlying stochastic drivers. We conclude with examples of how the model can be calibrated to EUR data.
Code (0)
등록된 구현이 없습니다.
Tasks
ManagementSimilar Papers 제목 키워드 기반
Rational Kernel on Pricing Models of Inflation Derivatives
The aim of this thesis is to analyze and renovate few main-stream models on inflation derivatives. In the first chapter of the thesis, concepts of financial instruments and fundamental terms are introduced, such as coupo…
Inflation, ECB and short-term interest rates: A new model, with calibration to market data
We propose a new model for the joint evolution of the European inflation rate, the European Central Bank official interest rate and the short-term interest rate, in a stochastic, continuous time setting. We derive the va…
The Connection Between Political Stability and Inflation: Insights from Four South Asian Nations
This study explores the relationship between political stability and inflation in four South Asian countries, employing panel data spanning from 2001 to 2021. To analyze this relationship, the study utilizes the dynamic …
Inflation Attitudes of Large Language Models
This paper investigates the ability of Large Language Models (LLMs), specifically GPT-3.5-turbo (GPT), to form inflation perceptions and expectations based on macroeconomic price signals. We compare the LLM's output to h…
Optimal life insurance and annuity decision under money illusion
This paper investigates the optimal consumption, investment, and life insurance/annuity decisions for a family in an inflationary economy under money illusion. The family can invest in a financial market that consists of…