Quadratic Gaussian inflation

Quadratic Gaussian inflation


The liquidity and transparency of the inflation options market has increased considerably in recent years, with all major brokers now providing screens with prices of year-on-year and zero-coupon caps and floors at various strikes. These prices show that the inflation market is characterised by a pronounced smile and skew in implied option volatilities, with implied distributions of year-on-year forwards having pronounced fat tails. It is therefore important that inflation derivatives pricing

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