IDEAS home Printed from https://ideas.repec.org/a/wly/jfutmk/v36y2016i1p66-87.html
   My bibliography  Save this article

The Sensitivity of Interest Rate Options to Monetary Policy Decisions: A Regime‐Shift Pricing Approach

Author

Listed:
  • René Ferland
  • Geneviève Gauthier
  • Simon Lalancette

Abstract

We look at whether monetary decisions constitute a significant macro‐finance risk for interest rate options and related implied volatilities. We devise an option‐pricing model based on the dynamics of the Federal Reserve's target rate via a regime‐shift approach modeled as discrete Markov chain capturing the timing of Federal Open Market Committee meetings. We find that the regime‐shift risk is significantly priced and that the downward and stable regimes of the target rate, associated with a decline in real activity, display higher probabilities of occurrence under the risk‐neutral measure. We also observe that implied volatilities display a counter‐cyclical behavior. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:66–87, 2016

Suggested Citation

  • René Ferland & Geneviève Gauthier & Simon Lalancette, 2016. "The Sensitivity of Interest Rate Options to Monetary Policy Decisions: A Regime‐Shift Pricing Approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(1), pages 66-87, January.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:1:p:66-87
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jfutmk:v:36:y:2016:i:1:p:66-87. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0270-7314/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.