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Macroeconomic derivatives: an initial analysis of market-based macro forecasts, uncertainty, and risk

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Author Info
Refet S. Gürkaynak
Justin Wolfers

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Abstract

In September 2002, a new market in "Economic Derivatives" was launched allowing traders to take positions on future values of several macroeconomic data releases. We provide an initial analysis of the prices of these options. We find that market-based measures of expectations are similar to survey-based forecasts, although the market-based measures somewhat more accurately predict financial market responses to surprises in data. These markets also provide implied probabilities of the full range of specific outcomes, allowing us to measure uncertainty, assess its driving forces, and compare this measure of uncertainty with the dispersion of point-estimates among individual forecasters (a measure of disagreement). We also assess the accuracy of market-generated probability density forecasts. A consistent theme is that few of the behavioral anomalies present in surveys of professional forecasts survive in equilibrium, and that these markets are remarkably well calibrated. Finally we assess the role of risk, finding little evidence that risk-aversion drives a wedge between market prices and probabilities in this market.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2005-26.

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Date of creation: 2005
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Handle: RePEc:fip:fedfwp:2005-26

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Keywords: Derivative securities ; Macroeconomics ; Forecasting;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  2. Victor Zarnowitz & Louis A. Lambros, 1987. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," NBER Working Papers 10504, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," Harvard Institute of Economic Research Working Papers 2011, Harvard - Institute of Economic Research. [Downloadable!]
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  5. Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, vol. 80(3), pages 375-89, June. [Downloadable!] (restricted)
  6. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51. [Downloadable!] (restricted)
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  7. Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 465-74, October.
  8. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December. [Downloadable!] (restricted)
  9. Jackwerth, Jens Carsten, 2000. "Recovering Risk Aversion from Option Prices and Realized Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(2), pages 433-51.
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  10. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 591-621, June. [Downloadable!] (restricted)
  11. Constantinides, George M, 1982. "Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation," Journal of Business, University of Chicago Press, vol. 55(2), pages 253-67, April. [Downloadable!] (restricted)
  12. Francis X. Diebold & Jinyong Hahn & Anthony S. Tay, 1999. "Multivariate Density Forecast Evaluation And Calibration In Financial Risk Management: High-Frequency Returns On Foreign Exchange," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 661-673, November. [Downloadable!] (restricted)
  13. Francis X. Diebold & Anthony S. Tay & Kenneth F. Wallis, 1997. "Evaluating Density Forecasts of Inflation: The Survey of Professional Forecasters," NBER Working Papers 6228, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting Prediction Market Prices as Probabilities," NBER Working Papers 12200, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lanne, Markku, 2007. "The Properties of Market-Based and Survey Forecasts for Different Data Releases," MPRA Paper 3877, University Library of Munich, Germany. [Downloadable!]
  2. Parker, John, 2007. "The Impact Of Economic News On Financial Markets," MPRA Paper 2675, University Library of Munich, Germany. [Downloadable!]
  3. Alessandro Beber & Michael W. Brandt, 2006. "Resolving Macroeconomic Uncertainty in Stock and Bond Markets," NBER Working Papers 12270, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Justin Wolfers & Eric Zitzewitz, 2006. "Prediction Markets in Theory and Practice," IZA Discussion Papers 1991, Institute for the Study of Labor (IZA). [Downloadable!]
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  5. Juan Piñeiro Chousa, & Artur Tamazian, & Davit N. Melikyan,, 2008. "MARKET RISK DYNAMICS AND COMPETITIVENESS AFTER THE EURO: Evidence from EMU Members," William Davidson Institute Working Papers Series wp916, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  6. Kjellberg, David, 2006. "Measuring Expectations," Working Paper Series 2006:9, Uppsala University, Department of Economics. [Downloadable!]
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