Abstract: Market inflation expectations are very important for market participant and of particular interest to central banks, especially when we are experiencing the baptism of the recent subprime and financial crisis. Using the financial market bond yields data and macro economy data, and an affine no-arbitrage model which incorporates macro and latent factors, the nominal and real yields are modelled jointly and the inflation compensations are decomposed into inflation expectations and premiums. Combining a macro economic structure and a micro financial model for estimating the term structure yields the advantage of evaluating the influence of macro factors on the complete term structure and capture the accurate inflation expectations. It is found that the short and medium expectations and the real inflation have strong influence each other, however the long term expectations and the real inflation have influence relatively weak each other. All term expectations are not the rational expectations, but the medium and long expectations are adaptive expectations. Further, the CPI is the most important influencing factor and its effect will increase with time. Meanwhile, the influence of the deposit rate takes the second place and it has the positive effect to short and medium expectations, and the negative effect to long expectations, but the impact of M2 is not significant. The short and medium expectations have the better predictive power of ex ante and ex post than the investigation expectations of the depositor-survey of People's Bank of China, so the method in this paper can be used as a useful supplement for obtaining inflation expectations.

Key words: affine and no- arbitrage, macroeconomic factor, latent factor, inflation expectations