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What are the odds? option-based forecasts of FOMC target changes

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Author Info

  • William R. Emmons
  • Aeimit K. Lakdawala
  • Christopher J. Neely

Abstract

This article uses probability forecasts derived from options to assess evolving market uncertainty about Federal Reserve monetary policy actions in a variety of recent events and episodes. Options on federal funds futures contracts reveal a complete probability density function over possible Federal Reserve target rates, thus augmenting the expectations provided by federal funds futures contracts. Option-based forecasts are most useful when more than two federal funds target outcomes are plausible at an upcoming policy meeting.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2006)
Issue (Month): Nov ()
Pages: 543-562

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Handle: RePEc:fip:fedlrv:y:2006:i:nov:p:543-562:n:v.88no.6

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Keywords: Federal Open Market Committee ; Forecasting ; Monetary policy;

References

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  1. Soderlind, P & Svensson, L-E-O, 1996. "New Techniques to Extract Market Expectations from Financial Instruments," Papers, Stockholm - International Economic Studies 621, Stockholm - International Economic Studies.
  2. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  3. Piazzesi, Monika & Swanson, Eric T., 2008. "Futures prices as risk-adjusted forecasts of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(4), pages 677-691, May.
  4. Hördahl, Peter & Vestin, David, 2003. "Interpreting implied risk-neutral densities: the role of risk premia," Working Paper Series, European Central Bank 0274, European Central Bank.
  5. Sarno, Lucio & Thornton, Daniel L & Valente, Giorgio, 2004. "Federal Funds Rate Prediction," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4587, C.E.P.R. Discussion Papers.
  6. Christopher J. Neely, 2004. "Miscommunication shook up mortgage, bond markets," The Regional Economist, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Apr, pages 4-9.
  7. Peter A. Abken, 1995. "Using Eurodollar futures options: gauging the market's view of interest rate movements," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Mar, pages 10-30.
  8. Christopher J. Neely, 2003. "Bond market mania," Monetary Trends, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Oct.
  9. John B. Carlson & Ben R. Craig & William R. Melick, 2005. "Recovering market expectations of FOMC rate changes with options on federal funds futures," Working Paper 0507, Federal Reserve Bank of Cleveland.
  10. Bliss, Robert R. & Panigirtzoglou, Nikolaos, 2002. "Testing the stability of implied probability density functions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(2-3), pages 381-422, March.
  11. Christopher J. Neely, 2005. "Using implied volatility to measure uncertainty about interest rates," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 407-425.
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Cited by:
  1. Bo Young Chang & Bruno Feunou, 2013. "Measuring Uncertainty in Monetary Policy Using Implied Volatility and Realized Volatility," Working Papers, Bank of Canada 13-37, Bank of Canada.

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