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The Information Content of Prices in Derivative Security Markets

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  • Louis O. Scott

    (International Monetary Fund)

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    Abstract

    Prices in futures and options markets reflect expectations about future price movements in spot markets, but these prices can also be influenced by risk premia. Futures and forward prices are sometimes interpreted as market expectations for future spot prices, and option prices are used to calculate the market's expectations for future volatility of spot prices. Do these prices accurately reflect market expectations? The information that is reflected in futures prices and option prices is examined in this paper through a review of both the relevant analytical models and the empirical evidence.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

    Volume (Year): 39 (1992)
    Issue (Month): 3 (September)
    Pages: 596-625

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    Handle: RePEc:pal:imfstp:v:39:y:1992:i:3:p:596-625

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    Cited by:
    1. Tsetsekos, George & Varangis, Panos, 1998. "The structure of derivatives exchanges : lessons from developed and emerging markets," Policy Research Working Paper Series, The World Bank 1887, The World Bank.
    2. Lan Zhang, 2012. "Implied and realized volatility: empirical model selection," Annals of Finance, Springer, Springer, vol. 8(2), pages 259-275, May.
    3. José Manuel Campa & P.H. Kevin Chang & James F. Refalo, 1999. "An Options-Based Analysis of Emerging Market Exchange Rate Expectations: Brazil's Real Plan, 1994-1997," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 99-08, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. Campa, Jose Manuel & Chang, P. H. Kevin, 1998. "The forecasting ability of correlations implied in foreign exchange options," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(6), pages 855-880, December.
    5. Nobuya Takezawa & Noriyoshi Shiraishi, 1998. "A Note on the Term Structure of Implied Volatilities for the Yen/U.S. Dollar Currency Option," Asia-Pacific Financial Markets, Springer, Springer, vol. 5(3), pages 227-236, November.
    6. Owain Ap Gwilym & Mike Buckle, 1999. "Volatility forecasting in the framework of the option expiry cycle," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 5(1), pages 73-94.
    7. Ammann, Manuel & Buesser, Ralf, 2013. "Variance Risk Premiums in Foreign Exchange Markets," Working Papers on Finance, University of St. Gallen, School of Finance 1304, University of St. Gallen, School of Finance.
    8. Jose M. Campa & P.H. Kevin Chang & Robert L. Reider, 1997. "Implied Exchange Rate Distributions: Evidence from OTC Option Markets," NBER Working Papers 6179, National Bureau of Economic Research, Inc.
    9. Cifarelli, giulio, 2002. "The information content of implied volatilities of options on eurodeposit futures traded on the LIFFE: is there long memory?," MPRA Paper 28538, University Library of Munich, Germany.
    10. Bronka Rzepkowski, 2001. "Pouvoir prédictif de la volatilité implicite dans le prix des options de change," Économie et Prévision, Programme National Persée, Programme National Persée, vol. 148(2), pages 71-97.
    11. Tsetsekos, George & Varangis, Panos, 2000. "Lessons in Structuring Derivatives Exchanges," World Bank Research Observer, World Bank Group, World Bank Group, vol. 15(1), pages 85-98, February.
    12. Martin Mandler, 2002. "Extracting Market Expectations from Option Prices: Two Case Studies in Market Perceptions of the ECB's Monetary Policy 1999/2000," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 138(II), pages 165-189, June.
    13. Giulio, Cifarelli, 2004. "Yes, implied volatilities are not informationally efficient: an empirical estimate using options on interest rate futures contracts," MPRA Paper 28655, University Library of Munich, Germany.

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