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Assessing central bank credibility during the ERM crises: Comparing option and spot market-based forecasts

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  • Haas, Markus
  • Mittnik, Stefan
  • Mizrach, Bruce

Abstract

Financial markets embed expectations of central bank policy into asset prices. This paper compares two approaches that extract a probability density of market beliefs. The first is a simulated moments estimator for option volatilities described in Mizrach (2002); the second is a new approach developed by Haas, Mittnik and Paolella (2004a) for fat-tailed conditionally heteroskedastic time series. We find, in an application to the ERM crises of 1992-93, that both the options and the underlying exchange rates provide useful information for policy makers.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 2 (2006)
Issue (Month): 1 (April)
Pages: 28-54

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Handle: RePEc:eee:finsta:v:2:y:2006:i:1:p:28-54

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Web page: http://www.elsevier.com/locate/jfstabil

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Citations

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Cited by:
  1. Haas, Markus & Mittnik, Stefan, 2008. "Multivariate regimeswitching GARCH with an application to international stock markets," CFS Working Paper Series 2008/08, Center for Financial Studies (CFS).
  2. Bruce Mizrach, 2006. "The Enron Bankruptcy: When did the options market in Enron lose it’s smirk?," Review of Quantitative Finance and Accounting, Springer, vol. 27(4), pages 365-382, December.
  3. Haas, Markus & Mittnik, Stefan & Paolella, Marc S., 2009. "Asymmetric multivariate normal mixture GARCH," Computational Statistics & Data Analysis, Elsevier, vol. 53(6), pages 2129-2154, April.
  4. Bruce Mizrach, 2007. "Recovering Probabilistic Information From Options Prices and the Underlying," Departmental Working Papers 200702, Rutgers University, Department of Economics.

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