7

This is in response to the part of your question that asks about M1 versus M2, although it seems you've more or less answered parts of your own question. M1 is the simplest monetary aggregate and includes items most widely used as a medium of exchange (approximately 85% of household purchases are made using M1 balances); it is defined as follows: \begin{...


7

I downvoted because I think the FED is very detailed in their documentation. The definition of a forward is a very basic financial question that a bit of google search can answer and not a quant question. Nonetheless, since your question is upvoted, others think differently. As the links you provided state: Breakeven is: 5-Year Treasury Constant Maturity ...


6

One explanation might be purely quantitative: The spread is to compensate for the present value (cost) of a possible future default. When interest rates rise all else equal, the discounted cost of future default decreases, which translates into tighter spreads. See for instance Leland(1994b) as presented here. As investigated in a paper from Kansas Fed ...


5

Yes, you could call this a liquidity effect. The 10yr breakeven rate is defined as the difference between the nominal yield of the 10yr Treasury and the real yield of the 10yr TIPS. The TIPS has less liquidity than the Treasury, so trades at a discount (in the sense of asset swap levels). There are a few other effects to do with the shape of the yield ...


3

Provided that it is always difficult to provide a unique answer to that problem in the stock market (it would be easier to answer it in the bond market instead, at least in my opinion), the simplest way you can look at it is that, if inflation expectations go up WITH all other conditions being unchanged, then future cash flows are discounted at a higher ...


3

In inflation world, the deal payoff is always based on a certain lag convention. That is, the value $I(T)$ always refers to a published index level several months ago or is interpolated based on those published index levels. For example, for a payoff on July 15, 2015, the indexed level referred is the published index level for May, 2015, based on the 2m ...


3

Consumer Price Index looks like a very nice straight line, perfectly approximated with linear function (considering it only after the 1972) ... We know that CPI and inflation are kinda related. How linear and exponent could be related? The past half century has been characterized as a period of "Great Moderation." Inflation pressure has generally ...


3

Long ago, I built a good (IMHO) P&L-explain for Latin American inflation-linked bonds, which included usable C&RD. I hope the below ideas might help. In markets like Mexico, Chile, Colombia an "inflation-adjusted currency" is treated as a separate currency. This is extremely convenient! You can say that you will have a fixed cash flow of $N$...


3

I saved a file, which has fitted 1-year real yield sampled at monthly frequency. It's my own calculation; feel free to use it. The best alternative sources for this kind of data tend to be bank research portals (e.g., JPMorgan's research website has similar data). I thought I'd provide some unsolicited comments on why this series, IMO, is not particularly ...


3

I think the help desk would have been able to help. According to the DES page, FWISUS55 Index is simply 2*USSWIT10 Curncy - USSWIT5 Curncy. These are zero coupon inflation swap quotes. This is a gross oversimplification. In terms of 5y5y only it works quite well (see the last link below). Seems SWIL (where these inflation swaps are used) is not supported in ...


3

Broadly speaking, if something is in M2 and not M1, it's because there's some friction in spending that money, while M1 allows for mostly frictionless transactions. M1 consists of currency in circulation, checkable/demand deposits, and travelers checks. All of these forms of money can be used to facilitate transactions immediately. M2 further incorporates ...


2

There is a market for inflation linked government bonds (some countries e.g. US,CA,UK,FR,Germany,...). There are various prices quoted. The price with inflation lift (the inflation that has accumulated since the inception of the bond) and the price without the lift reflecting future nominal interest and inflation. You can calculate the real yield to ...


2

I think the problem is that, for countries with a sizeable risk of hyperinflation, you will not have deep and mature markets to extract market expectations from. Argentina is a good example. Hyperinflation is just 'very big inflation', but you don't have inflation swaps in ARS. The CDS that you mention will pay in USD, and are therefore immune to ARS ...


2

There are actually a lot of options nowadays. Adjusting your data using historical realized inflation is certainly one way to go. And as @User1996 mentioned, the CPI for All Urban Consumers is the frequently quoted "headline" number. However, to the extent that asset prices reflect inflation expectations, it might be better to use forward-looking ...


2

The U.S. Consumer Price Index For All Urban Consumers (http://research.stlouisfed.org/fred2/series/CPIAUCSL) is the CPI you hear in the news, and is the standard inflation number.


2

For ZC inflation swaps, the fixed side cash flow is $$ N \big((1 + r)^T - 1\big), $$ where $N$ is the national amount, $r$ is the agreed upon ZC swap rate, and $T$ is the tenor of the swap. The floating side cash flow is $$ N\left( \frac{I(T)}{I_\text{base}} - 1 \right), $$ where $I_\text{base}$ is the base index level (reference index as of the effective ...


2

It's pretty much the same as a nominal bond, except cash flows need to be inflated. For example, here's the forward pricing formula for a Canadian-style linker, assuming one interim coupon payments: $$ \bigl(F(t_f) + AI_{t_f}\bigr) \frac{I(t_f)}{I_\text{base}} = (P + AI_{t_s})\cdot \frac{I(t_s)}{I_\text{base}}\cdot (1 + r \cdot t_f) - c\cdot \frac{I(t_c)}{...


2

You get a convexity adjustment from forward correlations only if you model separately the forwards and they are not perfectly correlated on the time interval $[0, T_1]$, as is the case in inflation market models where each forward CPI index is modelled separately from the others, with a global instantaneous correlation structure, not set to identity, similar ...


2

you can also solve this by using the PMT function and goalseek in excel. The answer is as follows: What I did is, I first set the interest rate to 0% and calculated the monthly payment using the PMT function. Then I goalseeked the monthly interest rate such that the monthly payment would be 300.


2

The annuity expression $a_{4}^{(12)}$is written as: $$a_{4}^{(12)}= \frac{1-(1+i)^{-4}}{i^{(12)}} = \frac{i}{i^{(12)}} a_4$$ where, $i$ is the effective annual rate of interest and $i^{(12)}$ is nominal rate of interest convertible monthly, which is equal to $$i^{(12)}=12((1+i)^{1/12}-1)$$ There is no closed formula to get the interest rate, you have to ...


2

There are 48 monthly payments. You can use the formula for the Present Value of an annuity: $12000 = 300 \frac{1}{i/12}[ 1-\frac{1}{(1+i/12)^{48}}]$ to find the interest rate However there is no explicit solution for i, it is solved by trial and error. The value I get is 9.2418%


2

This is not peer reviewed, but it fits the bill and is one of my favorite pieces on this topic: Inflation in 2010 and Beyond. I also recommend Antii Ilmanen’s Expected Returns, which has an entire chapter dedicated to inflation and asset returns. You can also review the papers that Antii references in that chapter.


2

This is your chart superimposed on an inflation rate at 2% per annum (most central banks target inflation). This chart seems to represent (mindful of yearly volatility) the typical behaviour of an exponential chart. The CPI (and RPI) indexes are based on a measured basket of goods regularly consumed by the consumer. I would suggest this is actually quite ...


2

First question I downvoted David answer because $f(0,0) \neq 0$ (generally speaking). And that's because it's the instantaneous forward rate at time $t=0$, that is $f(0,0) = f(0, 0, \Delta t)= r(0)$ so it's the starting value of the short rate process. In practice, you can set $\Delta t$ as one day (in years) and compute the forward rate (continuously ...


2

These are breakeven curves, you should make it clear that you are looking for the forward expectation of inflation, not observed inflation (i.e. not the CPI indexes). They are not normally published because they are derived from bond or swap prices which are typically proprietary to the relevant trading platform. UK publishes breakevens for RPI (not CPI) ...


2

I’m not an expert on Inflation derivatives, so I will just give you an explanation on why your finder doesn’t yield any root. In the Black & Scholes framework, it holds for the price of European Put options: $$P_{B S}(\sigma=0, T, K, S)=\left(K e^{-r(T-t)}-S\right)^{+},$$ $$P_{B S}(\sigma=\infty, T, K, S)=K e^{-r(T-t)}.$$ Given the parameters you ...


2

The standard approach here (as you probably know) would be to estimate a hedonic regression with a time-dummy. However, the problem you're facing (if I understand it correctly) is to estimate the price for a house with a given bundle of characteristics for times that lie beyond the last sold dates in the data set. One approach you can take is to estimate a ...


2

I would compare the breakeven rate (yield of most recently issued nominal bond minus real yield of most recently issued TIPS) with the realized rate, with the latter determined as follows : $$ (EndingTipsIndex/StartingTipsIndex)^{(1/n)} - 1$$ Where TIpsIndex is the CPI For All Urban Consumers Non Seasonally Adjusted, which you can find on the BLS website or ...


2

You need to think of inflation as a macro factor in the cross-section of returns. What exactly is a good inflation hedge? $$ r_{i,t}-r_f = \alpha_i + \beta_\pi^i \epsilon_{\pi, t} + u_{i,t} $$ If $\beta_\pi^i = 1$ we have a perfect inflation hedge. Meaning that if inflation surprises $\epsilon_{\pi, t}$ go up by 1%, return on your stock goes up by 1% as ...


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