Inflation Derivatives: Models, Calibration, and Pricing References
Summary
The discussion points to Brigo and Mercurio as a central reference for inflation derivatives, supplemented by practitioner research on inflation products and curve construction. Its coverage is relevant to studying inflation instruments, their valuation, and calibration, including applications in European markets; the cited material is presented as further reading rather than as a regional guide focused specifically on Italy.
The listed topics span zero-coupon and year-on-year inflation swaps, caplets and floorlets, alternative market models, calibration to market data, stochastic volatility, and hybrid payoffs with an inflation component. The discussion also describes a foreign-currency analogy and modeling forward CPI. It provides a map of subjects and sources, but no pricing equations, calibration example details, market data, or comparison of model performance. Readers should treat it as a starting point for study rather than a complete treatment of instrument conventions or country-specific market practice.
Key ideas
- Brigo and Mercurio is recommended for an overview of inflation derivatives and their pricing.
- The referenced material covers zero-coupon and year-on-year inflation swaps.
- Inflation caps, floorlets, and caplets are among the instruments discussed.
- Model topics include forward CPI dynamics, market-model variants, and stochastic volatility.
- Calibration and inflation-linked hybrid payoffs are also included in the suggested scope.
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Full text
# Book on Inflation models # Book on Inflation models I am wondering if there is a book (such as the Andersen Pieterbarg for rates) covering Inflation instead. I need to study Inflation instruments, models, model calibration and instrument pricing. I am especially interested in European and Italian inflation ## Answer by Dimitri Vulis (score 4) https://quant.stackexchange.com/a/79891 The discussion of inflation in Brigo and Mercurio should suffice for most purposes. Additional reading material that you may find useful: (If you can find online) - Jeroen Kerkhof (Lehman Research). Inflation Derivatives Explained: Markets, Products, and Pricing (July 2005) - Arroub Zine-eddine (OpenGamma Quantitative Research). Inflation: Instruments and curve construction (January 2014) - Barclays. Inflation Derivatives: A User’s Guide (2005) - Barclays. Global Inflation-Linked Products: A User's Guide (2004) ## Answer by NC520 (score 2) https://quant.stackexchange.com/a/79893 The section on Inflation in Brigo Mercurio covers the following topics: Pricing of Inflation-Indexed Derivatives - The Foreign-Currency Analogy - Definitions and Notation - The JY Model Inflation-Indexed Swaps - Pricing of a ZCIIS - Pricing of a YYIIS - Pricing of a YYIIS with the JY Model - Pricing of a YYIIS with a First Market Model - Pricing of a YYIIS with a Second Market Inflation-Indexed Caplets/Floorlets - Pricing with the JY Model - Pricing with the Second Market Model - Inflation-Indexed Caps Calibration to market data Introducing Stochastic Volatility - Modeling Forward CPI’s with Stochastic Volatility - Pricing Formulae Exact Solution for the Uncorrelated Case Approximated Dynamics for Non-zero Correlations - Example of Calibration Pricing Hybrids with an Inflation Component - A Simple Hybrid Payoff
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