Improving the Jarrow-Yildirim inflation model

A few years ago I came up with a useful improvement to the Jarrow-Yilidirm inflation model: let’s diffuse the inflation curve rather than the real-yield curve.

It turns out that this gives the modern inflation derivatives trader a much better risk management tool.

In the attached paper I give the details. I wrote it up back in 2013 and never got around to publishing it. It happens that I was talking to someone about this just the other day and it occurred to me that I should get it out there. Enjoy!

Improving the JY inflation model


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