<p>The Fisher Equation suggests that the spread between nominal and real interest rates is equal to the inflation expectations. In Sweden, where both nominal and inflation linked bonds exist the fisher equation implies that the yield spread could provide investors and policymakers with important information about markets inflation expectations. The aim of this thesis is therefore to estimate whether the yield spread between Swedish nominal and real interest rates - widely referred to as the Breakeven Inflation (BEI) - is a market based measure of inflation expectations. A sample based on historical bond prices between year 2000 and 2007 is used and adjusted for 3 distortions: i) The mismatch in cash flow structure arising from different bond characteristics. ii) The inflation indexation and bond finance implications (carry). iii) The seasonality in Consumer Price Index (CPI). In the absence of “true” inflation expectations, the benchmark used for the evaluation and comparison of the unadjusted and adjusted BEI series is the survey based, Prospera Money Market Players inflationary expectations, i.e. professional forecasters. The evaluation uses two statistical measures to estimate the errors, the Root Mean Squared Error (RMSE) to estimate the size of the forecast error and the Mean Error (ME) to measure the bias or the tendency for the forecast error to point in a particular direction. The general conclusion of the study is that both the unadjusted and the adjusted BEI series have improved significantly throughout the sample period as predictors of inflation expectations.</p><p>Further, in the first half of the sample, the MEs show that the BEI tends to underestimate inflation expectations, while in the second part of the sample the direction of the errors are less univocal. However, the carry adjusted and in some extent the carry and seasonality adjusted BEI seem to improve the BEI somewhat, although the conclusions are not very convincing. When using BEI to measure inflation expectations the conclusions should also be balanced against the possible bias associated with survey based expectations.</p>

The Fisher Equation suggests that the spread between nominal and real interest rates is equal to the inflation expectations. In Sweden, where both nominal and inflation linked bonds exist the fisher equation implies that the yield spread could provide investors and policymakers with important information about markets inflation expectations. The aim of this thesis is therefore to estimate whether the yield spread between Swedish nominal and real interest rates - widely referred to as the Breakeven Inflation (BEI) - is a market based measure of inflation expectations. A sample based on historical bond prices between year 2000 and 2007 is used and adjusted for 3 distortions: i) The mismatch in cash flow structure arising from different bond characteristics. ii) The inflation indexation and bond finance implications (carry). iii) The seasonality in Consumer Price Index (CPI). In the absence of “true” inflation expectations, the benchmark used for the evaluation and comparison of the unadjusted and adjusted BEI series is the survey based, Prospera Money Market Players inflationary expectations, i.e. professional forecasters. The evaluation uses two statistical measures to estimate the errors, the Root Mean Squared Error (RMSE) to estimate the size of the forecast error and the Mean Error (ME) to measure the bias or the tendency for the forecast error to point in a particular direction. The general conclusion of the study is that both the unadjusted and the adjusted BEI series have improved significantly throughout the sample period as predictors of inflation expectations. Further, in the first half of the sample, the MEs show that the BEI tends to underestimate inflation expectations, while in the second part of the sample the direction of the errors are less univocal. However, the carry adjusted and in some extent the carry and seasonality adjusted BEI seem to improve the BEI somewhat, although the conclusions are not very convincing. When using BEI to measure inflation expectations the conclusions should also be balanced against the possible bias associated with survey based expectations.

This paper is in large parts an update to a paper by Bekaert and Wang from 2010 called Inflation risk and the inflation risk premium. Its purpose is to find insights into the inflation hedging properties of the major asset classes. The analysis includes stocks, bonds, treasury bills, foreign bonds, real estate, gold, and gold futures for 43 countries and covers investment horizons up to five years. For developed countries it is found that gold, gold futures and bonds are the besthedge against inflation, both in the short and long run. Treasury bills have a relatively modest performance in the short term but improve with horizons to a great hedge. For emerging countries all asset classes provide a decent hedge, with a slight favor for treasury bills and a slightdisadvantage for real estate in the short and long run. All asset classes are poor hedges to unexpected inflation with an exception for real estate in longer investment horizons. The best hedge against unexpected inflation shocks is inflation-linked bonds. / Den här uppsatsen är i stort en uppdatering av en artikel av Bekaert och Wang från 2010 kallad Inflation risk and the inflation risk premium. Syftet är att hitta insikter i inflationsskyddande egenskaperna för de stora tillgångsklasserna. Analysen inkluderar aktier, obligationer, statsskuldväxlar, utländska obligationer, fastigheter, guld och guldterminer för 43 länder och täcker investeringshorisonter upp till fem år. För utvecklade länder finner vi att guld, guldterminer och obligationer är bästa skyddet mot inflation, både på kort och lång sikt. Statsskuldväxlar är ett relativt dåligt inflationsskydd på kort sikt, men blir ett bra skydd över längre horisonter. För tillväxtländer ger alla tillgångsslag en skapligt skydd, med en liten fördel för statsskuldväxlar och en liten nackdel för fastigheter i kort och långt perspektiv. Alla tillgångsklasser är dåliga skydd mot oväntad inflation, med ett undantag för fastigheter i längre investeringshorisonter. Det bästa skyddet emot oväntade inflationschocker är inflationskopplade obligationer.