Serving the Quantitative Finance Community

 
User avatar
pcaspers
Topic Author
Posts: 30
Joined: June 6th, 2005, 9:49 am
Location: Germany

Inflation Swaps / Turn of month (again)

June 3rd, 2015, 8:59 am

When looking at market quotes for zero coupon inflation swaps in EUR / HICPXT I have (for say, the 5y swap)29-May-2015 1,067501-Jun-2015 1,0725so +half a bp up, not very much. If I understand the conventions correctly the basis months and Fixings for these two quotes are howeverMay-3m => Feb-2015 115,87Jun-3m => Mar-2015 117,20If this is true I get an expected CPI (for the 5y pillar) of around 122,188 for the 29-May and 123,621 for the 01-Jun, which is a big move upwards.Assuming that the market perception for the expected CPI did not change drastically from 29-May to 01-Jun (or did it ?), why do the market quotes not adjusted to the changing basis month to even out the rise in the new basis Fixing ?Where am I wrong ?
 
User avatar
MHill
Posts: 21
Joined: February 26th, 2010, 11:32 pm

Inflation Swaps / Turn of month (again)

June 3rd, 2015, 10:31 am

Knowing f*ck all about a subject never stops me from commenting! This is my impression:So on 29/5 you would be buying inflation from Feb 2015 to Feb 2020.On 1/6, you would be buying inflation from Mar 2015 to Mar 2020.Inflation is seasonal (Look at CPTFEMU Index SEAG <Go>, if you have a Bloomberg).Since the swap runs for a whole number of years, you get to ignore the seasonality. The uptick from Feb to March 2015 should be resonably in line with the anticipated uptick from Feb to March 2020. The Swap quote is really just representing anticipated year-on-year inflation. Looking at CPTFEMUY Index SEAG <Go> (the YoY numbers), the starting month shouldn't impact the value of a contract that's for a whole number of years.
Last edited by MHill on June 2nd, 2015, 10:00 pm, edited 1 time in total.
 
User avatar
pcaspers
Topic Author
Posts: 30
Joined: June 6th, 2005, 9:49 am
Location: Germany

Inflation Swaps / Turn of month (again)

June 3rd, 2015, 11:24 am

well, you know a lot more than I do, obviously. Thanks, that totally makes sense. I will have a look at the historical seasonality and try to tweak the curve accordingly.
 
User avatar
Martinghoul
Posts: 188
Joined: July 18th, 2006, 5:49 am

Inflation Swaps / Turn of month (again)

June 5th, 2015, 9:25 am

This stuff is actually quite tricky these days... You have to make sure that the feeds you're getting your prices from does in fact switch to the new base month on the 1st, rather than on a different date. A lot of these conventions are in flux at the moment, due to the transition to central clearing. However, as MHill says, the sort of effect you're seeing should just be inflation seasonality in action, nothing more.
 
User avatar
pcaspers
Topic Author
Posts: 30
Joined: June 6th, 2005, 9:49 am
Location: Germany

Inflation Swaps / Turn of month (again)

June 5th, 2015, 9:48 am

it is, I can already see that with a decent seasonality adjustment in the curve estimated on the time series of actual fixings, the PL jumps disappear.Thank you both.
 
User avatar
pcaspers
Topic Author
Posts: 30
Joined: June 6th, 2005, 9:49 am
Location: Germany

Inflation Swaps / Turn of month (again)

June 16th, 2015, 2:20 pm

QuoteOriginally posted by: MartinghoulThis stuff is actually quite tricky these days... You have to make sure that the feeds you're getting your prices from does in fact switch to the new base month on the 1st, rather than on a different date. A lot of these conventions are in flux at the moment, due to the transition to central clearing. However, as MHill says, the sort of effect you're seeing should just be inflation seasonality in action, nothing more.in the light of central clearing, what would be the "standardized" way of estimating the seasonal adjustments then ?
 
User avatar
Martinghoul
Posts: 188
Joined: July 18th, 2006, 5:49 am

Inflation Swaps / Turn of month (again)

June 16th, 2015, 8:38 pm

I dunno, yet... If I am not mistaken, TOTEM is still being used, but I am not sure what the latest on this is. I know that there has been a lot of work done to make sure that swap conventions get harmonised.
 
User avatar
doublebarrier2000
Posts: 15
Joined: July 14th, 2002, 3:00 am

Inflation Swaps / Turn of month (again)

June 17th, 2015, 10:23 pm

..pcaspers.you also should remember that most EUR Indices use linear interpolation for the base level (between 3m and 2m lag using the 1st of the month..) same for the final expected index value too.
 
User avatar
pcaspers
Topic Author
Posts: 30
Joined: June 6th, 2005, 9:49 am
Location: Germany

Inflation Swaps / Turn of month (again)

June 18th, 2015, 7:48 am

QuoteOriginally posted by: doublebarrier2000..pcaspers.you also should remember that most EUR Indices use linear interpolation for the base level (between 3m and 2m lag using the 1st of the month..) same for the final expected index value too.for bonds, yes, but the quoted zero coupon swaps (on EUHICPXT) are not interpolating, are they ?