We would like to thank two anonymous referees, Naomi Belfer, Gerald Dwyer, Michael Gofman, Nitzan Regev, Haim Reizman, Monica Singhal, Bob Webb (the editor), and seminar participants at Boston University, Brandeis University, the 2008 CRSP Forum, and the 2009 FMA meetings for helpful comments and discussion.
Inflation Derivatives Under Inflation Target Regimes
Article first published online: 11 JUN 2012
© 2012 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 33, Issue 10, pages 911–938, October 2013
How to Cite
Avriel, M., Hilscher, J. and Raviv, A. (2013), Inflation Derivatives Under Inflation Target Regimes. J. Fut. Mark., 33: 911–938. doi: 10.1002/fut.21568
- Issue published online: 18 JUL 2013
- Article first published online: 11 JUN 2012
- Manuscript Accepted: 28 APR 2012
- Manuscript Received: 27 JUL 2010
Inflation targeting—the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target—has been adopted by more than 20 economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the pricing of inflation derivatives. We develop a flexible model of inflation targeting in which the central bank's intervention to steer inflation toward the target depends on past deviations and the policymaker's ability and will to enforce the target. We use our model to price inflation derivatives and demonstrate the impact of inflation targeting on derivative pricing.