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Interest rate expectations and uncertainty during ECB governing council days: evidence from intraday implied densities of 3-month Euribor

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  • Vergote, Olivier
  • Puigvert Gutiérrez, Josep Maria

Abstract

This paper analyses changes in short-term interest rate expectations and uncertainty during ECB Governing Council days. For this purpose, it first extends the estimation of risk-neutral probability density functions up to tick frequency. In particular, the non-parametric estimator of these densities, which is based on fitting implied volatility curves, is applied to estimate intraday expectations of threemonth EURIBOR three months ahead. The estimator proves to be robust to market microstructure noise and able to capture meaningful changes in expectations. Estimates of the noise impact on the statistical moments of the densities further enhance the interpretation. In addition, the paper assesses the impact of the ECB communication during Governing Council days. The results show that the whole density may react to the communication and that such repositioning of market participants’ expectations will contain information beyond that of changes in the consensus view already observed in forward rates. The results also point out the relevance of the press conference in providing extra information and triggering an adjustment process for interest rate expectations. JEL Classification: C14, E43, E52, E58, E61

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1391.

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Date of creation: Oct 2011
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Handle: RePEc:ecb:ecbwps:20111391

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Keywords: announcement effects; central bank communication; interest rate expectations; intraday analysis; option-implied densities; risk-neutral probability density functions; tick data;

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  1. Ehrmann, Michael & Fratzscher, Marcel, 2007. "Explaining monetary policy in press conferences," Working Paper Series 0767, European Central Bank.
  2. JosÈ B. Campa & P.H. Kevin Chang & Robert L. Reider, 1997. "ERM bandwidths for EMU and after: evidence from foreign exchange options," Economic Policy, CEPR & CES & MSH, vol. 12(24), pages 53-89, 04.
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  8. Bliss, Robert R. & Panigirtzoglou, Nikolaos, 2002. "Testing the stability of implied probability density functions," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 381-422, March.
  9. Josep Maria Puigvert-Gutiérrez & Rupert de Vincent-Humphreys, 2012. "A Quantitative Mirror on the Euribor Market Using Implied Probability Density Functions," Eurasian Economic Review, Eurasia Business and Economics Society, vol. 2(1), pages 1-31, Spring.
  10. Bhupinder Bahra, 1997. "Implied risk-neutral probability density functions from option prices: theory and application," Bank of England working papers 66, Bank of England.
  11. Andersson, Magnus, 2007. "Using intraday data to gauge financial market responses to Fed and ECB monetary policy decisions," Working Paper Series 0726, European Central Bank.
  12. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
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