Theodora Jung presenterar sitt examensarbete

Inflation Market Modelling


Abstract

This thesis covers the inflation market and how the modelling process
can be done. The inflation linked market has grown into a distinct
asset class and will probably continue its rapid growth. Government
issuance has taken place in all G7 countries and has created a real
curve with outstanding inflation linked bonds for those markets.  The
Consumer Price Index (CPI) is used to measure the cost of a consumer
basket in nominal terms. The CPI is published once a month and is used
for calculating the inflation over a certain period, enabling
calculations of the purchasing power.  The inflation curve can be
modelled in various ways and in this thesis the inflation is treated
as the exchange rate between the nominal and real economy, i.e. the
Fisher equation is used. The forward CPI curve can be constructed in
two different ways; with the inflation breakeven swap rate or with the
inflation linked bonds. The bootstrapping method determines the
resulting inflation curve, which then is adjusted for seasonality.
The process from input to output in the inflation yield curve
construction is described in detail in this thesis, with graphs
analysing the model's result compared to BNP Paribas'
values, showing a high accuracy.