VIX and Market-Implied Inflation Expectations

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

Market Risk and Market-Implied Inflation Expectations

We examine interactions between market risk and market-implied inflation expectations. We argue that these interactions are asymmetric and varied in time. Specifically, market risk becomes elevated by expectations of either very low or high expected inflation. Market risk does not react to expectations of moderate, stable inflation. In our analysis, market risk is proxied by VIX and market-implied inflation expectations are reflected by five- and ten-year breakeven inflation. We use daily data for 5 and 10 year breakeven inflation and VIX for the sample period January 3, 2003 – January 24, 2019 for empirical testing. We employ asymptotic VAR, multiple breakpoint regression and Markov switching tests to examine changeable patterns in these interactions. Our tests indicate prevalence of responses of expected low inflation or deflation to higher market risk, mainly for the 5-year breakeven inflation series. These responses are particularly significant during the run-up and aftermath of the 2008 financial crisis

Uncovered Equity Returns Parity in Non‐Euro Central European EU Member Countries

This paper examines a nexus between euro values of local currencies and returns to equities in non‐euro Central European countries (CECs) relative to returns in a global equity market. In essence, it analyses whether the uncovered equity returns parity (UERP) condition holds in these countries. In theory, the UERP condition holds if higher returns in a local equity market relative to the global market returns are offset by the local currency depreciation. The underlying UERP model examines the relationship between local currencies in euro and CEC equity returns relative to a global market index proxied by Wilshire5000 index. We assume that the UERP relationship is country‐sensitive, time‐dependent and state‐dependent, that is, it varies among countries and depends on economic and financial market conditions. The model is tested with the Bai–Perron multiple breakpoint regressions for structural breaks, as well as the two‐state Markov switching test for state dependence, during the January 4, 1999–February 25, 2020 sample period. We find that UERP condition holds in CECs mainly at times of financial distress, including the peak and the aftermath of the 2008–2010 global financial crisis