AbstractsMathematics
Estimation of a Liquidity Premium for Swedish Inflation Linked Bonds
| Institution: | KTH Royal Institute of Technology |
|---|---|
| Department: | |
| Year: | 2014 |
| Keywords: | Inflation linked yields; State space model; Kalman filter; Maximum likelihood estimation; Natural Sciences; Mathematics; Probability Theory and Statistics; Naturvetenskap; Matematik; Sannolikhetsteori och statistik; Master of Science - Mathematics; Teknologie masterexamen - Matematik; Mathematical Statistics; Matematisk statistik |
| Record ID: | 1334397 |
| Full text PDF: | http://urn.kb.se/resolve?urn=urn:nbn:se:kth:diva-145756 |
Abstract
It is well known that the inflation linked breakeven inflation, defined as the difference between a nominal yield and an inflation linked yield, sometimes is used as an approximation of the market’s inflation expectation. D’Amico et al. (2009, [5]) show that this is a poor approximation for the US market. Based on their work, this thesis shows that the approximation also is poor for the Swedish bond market. This is done by modelling the Swedish bond market using a five-factor latent variable model, where an inflation linked bond specific premium is introduced. Latent variables and parameters are estimated using a Kalman filter and a maximum likelihood estimation. The conclusion is drawn that the modelling was successful and that the model implied outputs gave plausible results.
