Prediction Of Real Rates,Inflation Risk Premium And Inflation Expectation Based On ARIMA Model

Real interest rates and inflation expectation are important for the policy makers,the bond issuers and investors.And they have large impact on the movement of both monetary policy and fiscal policy.Real interest rate is the real return that an investor can obtain by investing,it helps the investors to avoid inflation increase risk.Inflation expectation is the average estimate of inflation on a certain future period,it's important for both the market participants and policy makers' decision and action.This paper investigates the US treasury yield and TIPS yield,extracting real interest rate in the period of 2004-2016 of America from 2-year treasury yield and TIPS yield curve.The result showed that the model-implied real rate is positive during 2004 to 2010 and negative after 2010,reflecting the loose monetary policy after financial crisis.Furthermore,negative correlation was found between real interest rate and inflation risk premium,which is consistent with a number of literature.Using ARIMA model and MIDAS model to analyze the inflation risk premium,this paper found that ARIMA model provides more accurate prediction than MIDAS model,and it can perfectly tract the time series property of inflation risk premium.Also this paper provides the estimate of daily inflation expectation.By comparing to existed indices,this paper also found that the implied inflation expectation can be served as a good proxy for people's average expectation of future change or movements of inflation.Most importantly,it's the first time for daily inflation expectation being estimated,which is meaningful for real-time decisions.