Download or read book Estimation of the Inflation Risk Premium written by Pavol Povala and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This master's thesis analyzes the inflation risk premium embodied in the nominal interest rates based on UK government index-linked and nominal securities data in a period of high and volatile inflation, 1985 to 1992, and in a period of low and stable inflation, 1997 to 2007. To recover the inflation risk premium a discrete time term structure model is estimated, using jointly real and nominal yields. Inflation is modeled as an observable factor uncorrelated with latent factors in an affine Gaussian framework. Subsequently, the dynamics of the inflation risk premium and its driving factors are studied in both periods. In the first period, I find the inflation risk premium to be significant most of the time, strongly time-varying and occasionally negative, in the second period the inflation risk premium is only significant at a few points and significantly lower. The variance decomposition of the nominal-to-real yield spread shows that movements in spreads are mostly driven by changes in the inflation risk premium, especially at the long end of the curve.