tailieunhanh - RESEARCH DISCUSSION PAPER: Estimating Infl ation Expectations with a Limited Number of Infl ation-indexed Bonds

Empirical work, however, finds little support for the result of the ICAPM and documents the existence of a “home bias”--a situation where investors prefer to invest at home rather than abroad. 5 The “home bias” is puzzling because it means that investors are not only foregoing higher returns from investing abroad but they are also holding a portfolio that is not sufficiently diversified. Scholars have argued that a large measure of the home bias can be explained in terms of information asymmetries. Kang and Stulz (1997), for example, document that foreign investors in Japan disproportionally own more shares. | Reserve Bank of Australia RESEARCH DISCUSSION PAPER Estimating Inflation Expectations with a Limited Number of Inflation-indexed Bonds Richard Finlay and Sebastian Wende RDP 2011-01 ESTIMATING INFLATION EXPECTATIONS WITH A LIMITED NUMBER OF INFLATION-INDEXED BONDS Richard Finlay and Sebastian Wende Research Discussion Paper 2011-01 March 2011 Economic Research Department Reserve Bank of Australia The authors thank Rudolph van der Merwe for help with the central difference Kalman filter as well as Adam Cagliarini Jonathan Kearns Christopher Kent Frank Smets Ian Wilson and an anonymous referee for useful comments and suggestions and Mike Joyce for providing UK data. Responsibility for any remaining errors rests with the authors. The views expressed in this paper are those of the authors and are not necessarily those of the Reserve Bank of Australia. Author finlayr at domain Media Office rbainfo@ Abstract We estimate inflation expectations and inflation risk premia using inflation forecasts from Consensus Economics and Australian inflation-indexed bond price data. Inflation-indexed bond prices are assumed to be non-linear functions of latent factors which we model via an affine term structure model. We solve the model using a non-linear Kalman filter. While our results should not be interpreted too precisely due to data limitations and model complexity they nonetheless suggest that long-term inflation expectations are well anchored within the 2 to 3 per cent inflation target range while short-run inflation expectations are more volatile and more closely follow contemporaneous inflation. Further while long-term inflation expectations are generally stable inflation risk premia are much more volatile. This highlights the potential benefits of our measures over break-even measures of inflation which include both components. JEL Classification Numbers E31 E43 G12 Keywords inflation expectations inflation risk premia affine term structure model .