Kitsul, Yuriy; Wright, Jonathan H. - 2012 - First Draft: January 3, 2012, This version: June 6, 2012
Recently a market in options based on CPI inflation (inflation caps and floors) has emerged in the US. This paper uses … quotes on these derivatives to construct probability densities for inflation. We study how these pdfs respond to news … empirical pricing kernels. The options-implied densities assign considerably more mass to extreme inflation outcomes (either …