Inflation (index) curve construction
Inflation (index) curve construction
Loading saved threads...
Plissken · External communityPost link
External question — Quantitative Finance Stack Exchange
Author: Plissken
Original post: https://quant.stackexchange.com/questions/81368
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
We have constructed an inflation curve which is based on liquid ZCIS. All in all it fits well with other providers (including the seasonal factors).
I am looking for alternative references on how to construct the inner most part of the curve (sub 1Y). As far as I can see from books, technical documents and other online resources then there are three options:
Monthly fixings (up to 1Y) from brokers.
Using the known index values (published CPI), the seasonal factors, the known 1Y quote (and interpolate between these.
Using the known index values (published CPI), economic forecasts, the seasonal factors, the known 1Y quote (and interpolate between these.
Note, that when we have a known published CPI value or an inflation forecast, then we can back out a "breakeven" value consistent with the following equality and use this "breakeven" for the beginning of the breakeven curve:
$Index_t=Index_0*(1+b(0,T_s,T_e))^t$
where we know
$Index_t$
(known CPI or forecasted CPI),
$Index_0$
(base of the curve - known CPI) and
$t$
(maturity).
Point 2 and to a certain extent 3. above give a lot of volatility in first part of the curve (when switching to a new month as we go from 3 known CPI values to 2, and then again later mid-month when a new CPI value is published).
What options, if any, are available to reduce this volatility, while still maintaining a market consistent curve?
Quote
Report
Post Reply
Quoted from Forex.com.bd-Editorial External question — Quantitative Finance Stack Exchange Author: Plissken Source score (net votes, not local likes): 3 Original post: https://quant.stackexchange.com/questions/81368 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. We have constructed an inflation curve which is based on liquid ZCIS. All in all it fits well with other providers (including the seasonal factors). I am looking for alternative references on how to construct the inner most part of the curve (sub 1Y). As far as I can see from books, technical documents and other online resources then there are three options: Monthly fixings (up to 1Y) from brokers. Using the known index values (published CPI), the seasonal factors, the known 1Y quote (and interpolate between these. Using the known index values (published CPI), economic forecasts, the seasonal factors, the known 1Y quote (and interpolate between these. Note, that when we have a known published CPI value or an inflation forecast, then we can back out a "breakeven" value consistent with the following equality and use this "breakeven" for the beginning of the breakeven curve: $Index_t=Index_0*(1+b(0,T_s,T_e))^t$ where we know $Index_t$ (known CPI or forecasted CPI), $Index_0$ (base of the curve - known CPI) and $t$ (maturity). Point 2 and to a certain extent 3. above give a lot of volatility in first part of the curve (when switching to a new month as we go from 3 known CPI values to 2, and then again later mid-month when a new CPI value is published). What options, if any, are available to reduce this volatility, while still maintaining a market consistent curve?
Checking account access…