Date of Award
Doctor of Business Administration (DBA)
Jack Welch College of Business
Dr. Lucjan T. Orlowski
Our study shows that market-implied inflation expectations proxied by the breakeven inflation are directly related to market risk in high inflation environments and inversely during the periods of declining inflation or deflationary expectations. We use daily data series of percent changes in VIX as a proxy of market risk and changes in 5-year and 10-year breakeven inflation reflecting expectations of bond market participants. We employ Bayesian VAR, multiple breakpoint and Markov switching tests to examine the functional relationship between VIX and breakeven inflation for the January 3, 2003 – April 5, 2016 sample period. Our tests indicate a significant inverse relationship between VIX and, particularly, the 5-year breakeven inflation, which holds mainly during the recent financial crisis and the post-crisis periods.
Highlights: • Recent increases in market risk are associated with deflationary expectations • Significant negative relationship between 5Y &10Y BEI, and VIX prevails in 2008-2013 • 5Y BEI inflation expectations relate with market risk better than 10Y BEI • Partial regime switching between VIX and BEI occurs during turbulent markets
Soper, C.C. (2017). VIX and market-implied inflation expectations. Jack Welch College of Business dissertation. Sacred Heart University, Fairfield, CT.
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