Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico

Authors

Remy Beauregard

Eric Fischer

Simon Zhu

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2021-08 | November 1, 2021

To study inflation expectations and associated risk premia in emerging bond markets, this paper provides estimates for Mexico based on an arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for their liquidity risk. In addition to documenting the existence of large and time-varying liquidity premia in nominal and real bond prices that are only weakly correlated, the results indicate that long-term inflation expectations in Mexico are well anchored close to the inflation target of the Bank of Mexico. Furthermore, Mexican inflation risk premia are larger and more volatile than those in Canada and the United States.

Article Citation

Fischer, Eric, Jens H. E. Christensen, Remy Beauregard, and Simon Zhu. 2021. “Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico,” Federal Reserve Bank of San Francisco Working Paper 2021-08. Available at https://doi.org/10.24148/wp2021-08

About the Author
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Jens Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Jens Christensen