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Extracting Market Expectations from Option Prices: Two Case Studies in Market Perceptions of the ECB's Monetary Policy 1999/2000

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  • Martin Mandler

Abstract

In recent years various different techniques to uncover the information on market expectations contained in option prices have been developed. This paper applies the technique of fitting a mixture of lognormal densities to LIFFE Euribor futures options to estimate the risk-neutral implied probability density function for the future level of interest rates. Two sets of option prices are considered which cover the ECB's increases in official interest rates in November and February. The results are found to be consistent with market comment prevailing at that time.

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Bibliographic Info

Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 138 (2002)
Issue (Month): II (June)
Pages: 165-189

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Handle: RePEc:ses:arsjes:2002-ii-4

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Related research

Keywords: interest rate futures options; implied risk-neutral probability density functions; market expectations; monetary policy;

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References

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  1. Söderlind, Paul, 1997. "Market Expectations in the UK Before and After the ERM Crisis," Working Paper Series in Economics and Finance 210, Stockholm School of Economics, revised 01 Sep 1998.
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Cited by:
  1. Vähämaa, Sami, 2004. "Option-implied asymmetries in bond market expectations around monetary policy actions of the ECB," Working Paper Series 0315, European Central Bank.

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