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Bank of Spain30 October 2026Documento ocasional

Occasional Papers. 2625. Measuring Euro-Area Inflation Risk with Options: Market-Implied Distribution and Balance of Risks.

The Neural Herald summary, AI-generated

Occasional Paper developing a framework to extract from inflation options the probability distribution of future euro area inflation, at spot and forward horizons. A parametric model (SABR) and a non-parametric estimator deliver very similar results in skewness, kurtosis and tail risks.

Key points

Who is affected

Market analysts, fixed income managers and monetary policy researchers.

Plain-language version

The Bank of Spain presents a method to measure the risk that inflation, the general rise in prices, in the euro area ends up much higher or lower than expected. It uses options, financial contracts through which investors bet on future inflation. It helps show what markets expect to happen to prices.
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