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

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  • Vähämaa, 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

Paper provided by European Central Bank in its series Working Paper Series with number 0315.

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Date of creation: Mar 2004
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Handle: RePEc:ecb:ecbwps:20040315

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Keywords: asymmetries; implied skewness; market expectations; monetary policy;

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Citations

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Cited by:
  1. Ippei Fuijwara & Lena Mareen Korber & Daisuke Nagakura, 2013. "Asymmetry in Government Bond Returns," Macroeconomics Working Papers 23399, East Asian Bureau of Economic Research.
  2. Ippei Fuijwara & Lena Mareen Korber & Daisuke Nagakura, 2013. "Is there asymmetry in the distribution of government bond returns in developed countries?," AJRC Working Papers 1301, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  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. Bhattacharyya, Indranil & Sensarma, Rudra, 2008. "How effective are monetary policy signals in India," Journal of Policy Modeling, Elsevier, vol. 30(1), pages 169-183.
  5. 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.

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