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Option-implied asymmetries in bond market expectations around monetary policy actions of the ECB

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  • Vahamaa, Sami

Abstract

This paper uses data on German government bond futures options to examine the behaviour of market expectations around monetary policy actions of the European Central Bank (ECB). In particular, this paper focuses on the asymmetries in bond market expectations, as measured by the skewness of option-implied probability distributions of future bond yields. The results show that market expectations are systematically asymmetric around monetary policy actions of the ECB. Around monetary policy tightening, option-implied yield distributions are positively skewed, indicating that market participants attach higher probabilities for sharp yield increases than for sharp decreases. Correspondingly, around loosening of the policy, implied yield distributions are negatively skewed, suggesting that markets assign higher probabilities for sharp yield decreases than for increases. Furthermore, the results indicate that market expectations are significantly altered around monetary policy actions, as asymmetries in market expectations tend to increase before changes in the monetary policy stance, and to decrease afterwards. JEL Classification: E44, E52, G10, G13

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 57 (2005)
Issue (Month): 1 ()
Pages: 23-38

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Handle: RePEc:eee:jebusi:v:57:y:2005:i:1:p:23-38

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Citations

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Cited by:
  1. Daisuke Nagakura & Lena Mareen Korber & Ippei Fujiwara, 2013. "Asymmetry in government bond returns," AJRC Working Papers 01, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  2. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
  3. Beber, Alessandro & Brandt, Michael W., 2006. "The effect of macroeconomic news on beliefs and preferences: Evidence from the options market," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1997-2039, November.
  4. Ippei Fuijwara & Lena Mareen Korber & Daisuke Nagakura, 2013. "Asymmetry in Government Bond Returns," Finance Working Papers 23399, East Asian Bureau of Economic Research.
  5. Bhattacharyya, Indranil & Sensarma, Rudra, 2008. "How effective are monetary policy signals in India," Journal of Policy Modeling, Elsevier, vol. 30(1), pages 169-183.
  6. repec:csg:ajrcwp:1301 is not listed on IDEAS
  7. Schlögl, Erik, 2013. "Option pricing where the underlying assets follow a Gram/Charlier density of arbitrary order," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 611-632.

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