https://doi.org/10.1140/epjp/s13360-023-04778-5
Regular Article
Investigating stochastic volatility and jumps in inflation dynamics: an empirical evidence with oil price effect
1
Department of Mathematics, Faculty of Sciences and Technology, Cadi Ayyad University, 549, 40.000, Marrakesh, Morocco
2
High Commission for Planning, 178, 31-3, Rabat, Morocco
Received:
28
October
2023
Accepted:
6
December
2023
Published online:
20
December
2023
This paper deals with an analysis of the inflation dynamics using Stochastic Differential Equations framework. We design a novel model which aims to reveal the outstanding features of the inflation rate including stochastic volatility and spikes. The considered modeling approach enhances the pre-existing models by introducing stochastic volatility, mean-reversion and jumps in the concerned state process. The mathematical framework combines an economic model derived from inflation theories and a diffusion model based on probability analysis, which are successfully tested using empirical estimation and simulation tools. The Joint Maximum Likelihood equation is then calculated to estimate the model parameters for the U.S. inflation rate. We find that integrating stochastic volatility and jumps in the inflation rate process is absolutely essential to effectively simulate the actual dynamics. We derive inflation rate responses to oil price shocks and confirm the validity of the resulting models by their potential to incorporate observed inflation dynamics. The study provides a realistic and reproducible modeling approach to address the inflation rate challenges.
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© The Author(s), under exclusive licence to Società Italiana di Fisica and Springer-Verlag GmbH Germany, part of Springer Nature 2023. Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
