For example, the difference between nominal bond yields and real yields of inflationlinked bonds, known as the “break-even inflation rate”, comprises the average rate of inflation expected by the market over the maturity of the bonds and the premium investors demand for incurring the inflation risk.
Thus, in order to be able to extract investors’ inflation expectations, we have to estimate the inflation risk premium. For this reason, the empirical modelling of risk premia in financial markets is an important and active area of research at the ECB and other central banks.