This paper investigates the inflation risk premia on UK nominal gilts and inflation swaps. We find strong evidence of time-varying inflation risk premia embedded in the prices of both these market instruments and reject the inflation expectations hypothesis, which ignores these risk premia. The average inflation risk premia have increased considerably since 2004 and during this time the term structure of inflation risk premia has changed from flat to upward sloping. The relatively simple econometric model designed for this study is found to produce more accurate inflation forecasts than market break-even inflation rates and surveys by Consensus Economics.
|Journal||Annals of Actuarial Science|
|Publication status||In preparation - 2013|