Hands-On: Calculating Implicit Inflation with Alphacast
Hands-On: Calculating Implicit Inflation with Alphacast
By Martina Mas(mmas@alphacast.io)
Read more Alphacast Highlights here
Are you intrigued by the compelling world of capital markets? Alphacast provides a comprehensive collection of financial data which includes bond and treasury bill information, allowing users to analyze market trends and estimate the expected inflation rate.
To begin to calculate the implicit inflation rate of any of those instruments, several key elements are necessary. First and foremost, access to reliable and friendly-user financial datasets, such as those provided by Alphacast. Our datasets includes essencial lnformation about bond yields, treasury bill rates, internal rates of return and other relevant market indicators. Let's start this process.
How to determinate implicit rates in Bonds
Our starting point is determinated at Financial - Argentina - IAMC - Fixed Income Report. Up to here, just select the "TIR Anual" at variables and use the Transform Data option, that will direct you to create a pipeline.
It comes the right moment to put your knowledge of financial mathematics to the trial. To proceed, you should add another step and utilize the Calculate Variable option.
Calculating the implicit rate requires two elements: a fixed-rate bond and an inflation-adjusted bond (such as Argentina's CER Bonds). The following formula compares the annualized yield rates between a fixed-rate bond and an inflation-adjusted bond to determine the annualized implicit inflation rate, reflecting the expected difference in yields due to inflation.
Implicit annualized inflation rate = (((1+TIR Fixed-rate bond)/(1+TIR Inflation-adjusted bond))-1)x100
Note: You must noticed that in the formula we used in pipelines, we scaled down the decimal values by dividing each TIR by 100. This is just a mathematical adjustment to express the decimals in terms of rates and obtain reasonable numbers.
Another important aspect to consider is the specific bonds used in each case: T023 and T026 refer to fixed-rate bonds issued in pesos, for 2023 and 2026 respectively. On the other hand, T2X3 and TX26 allude to inflation-adjusted bonds or CER bonds, for 2023 and 2026 respectively. Additionally, we need to choose names for both new variables that will represent the implicit inflation rate in 2023 the same in 2026.
Opcionally, to have a more comprehensive view, you should perform the same calculation to obtain the monthly implicit inflation rate. As a result, the previous formula transforms as this one:
Monthly Implicit inflation rate = (((1+TIR Fixed-rate bond)/(1+TIR Inflation-adjusted bond))^(1/12)-1)x100
Finally, we will visualize all this newly generated information in a chart. For that, we need to add another step and select Create a chart. Firstly, we select the variables to be displayed, in our case, both implicit inflation rates annualized and monthly and then hit "Save" to witness the magic unfold.
It is suggested to have monthly inflation rates appear on the secondary axis for better comprehension of the chart. In order to achieve that, go to the "Data" section and check the option for the secondary axis for each variable.
In the end, you have the freedom to customize your chart to your liking. You can add a captivating title, define the time range from beginning to end, modify variable names, select a color scheme that resonates with your style, and explore a plethora of others personalization alternatives.
Is it possible to use the same procedure for Treasury bills?
Sure. Let's see how it works. The initial step is identical, just start by searching for "TIR" at variables and using the Transform Data button at the following dataset: Financial - Argentina - IAMC - Bills - Fixed Rate (Letes)
The next step is essential to have all the necessary variables at our disposal. Just select the Merge with Dataset step, which allows to add data by linking the corresponding dates and entities. This time is needed Financial - Argentina - IAMC - Bills - Inflation-linked (Lecer) dataset. This particular dataset contains financial information related to inflation-linked bills in Argentina, specifically the IAMC bills.
For the calculations that will be performed next, it is necessary that each column represents a different treasury bill, for which Long to Wide is the most indicated option. For this purpose, in the entity to convert just select "Ticker" and for the values in the columns that should appear use "TIR".
Now let's delve into the mathematical part. For that, we need to calculate the implicit inflation rates of the Treasury bills on a monthly basis. In this example, we will require both the TIR for Treasury bills and inflation-adjusted Treasury bills. The provided formula to be considered can be expressed as follows:
Monthly Implicit Inflation Rate = (((1+TIR Fixed-rate bill)/(1+TIR Inflation-adjusted bill))^(1/12))-1)x100
Once the financial procedure has been outlined, lets proceed to utilize the Calculate Variable step.
Last but not least, an optional step is to Merge with Dataset and select the dataset used in the previous guide to display too the annual rates on the same chart.
From this point forward, all that remains is to Create a chart and select the variables of interest to display.
Furthermore, Alphacast offers a multitude of customization possibilities. Get ready for select your desired color scheme, fine-tune the axis labels, and incorporate annotations to enhance the visual appeal and informational value of your chart.
