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

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  • Refet S. Gürkaynak
  • Justin Wolfers

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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Bibliographic Info

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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  1. Victor Zarnowitz & Louis A. Lambros, 1983. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
  2. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Discussion Papers, Stanford Institute for Economic Policy Research 03-025, Stanford Institute for Economic Policy Research.
  3. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting prediction market prices as probabilities," Working Paper Series, Federal Reserve Bank of San Francisco 2006-11, Federal Reserve Bank of San Francisco.
  4. Jackwerth, Jens Carsten, 2000. "Recovering Risk Aversion from Option Prices and Realized Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 13(2), pages 433-51.
  5. Constantinides, George M, 1982. "Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation," The Journal of Business, University of Chicago Press, vol. 55(2), pages 253-67, April.
  6. Mankiw, N. Gregory & Reis, Ricardo & Wolfers, Justin, 2003. "Disagreement about Inflation Expectations," Research Papers 1807, Stanford University, Graduate School of Business.
  7. Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 19(4), pages 465-74, October.
  8. Yacine Ait-Sahalia & Andrew W. Lo, 2000. "Nonparametric Risk Management and Implied Risk Aversion," NBER Working Papers 6130, National Bureau of Economic Research, Inc.
  9. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(3), pages 591-621, June.
  10. 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.
  11. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 51(5), pages 1611-32, December.
  12. Francis X. Diebold & Anthony S. Tay & Kenneth F. Wallis, 1998. "Evaluating Density Forecasts of Inflation: The Survey of Professional Forecasters," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 98-15, New York University, Leonard N. Stern School of Business, Department of Economics.
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  14. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
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  16. Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, American Economic Association, vol. 80(3), pages 375-89, June.
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Cited by:
  1. Dungey, Mardi & McKenzie, Michael & Smith, L. Vanessa, 2009. "Empirical evidence on jumps in the term structure of the US Treasury Market," Journal of Empirical Finance, Elsevier, Elsevier, vol. 16(3), pages 430-445, June.
  2. Justin Wolfers & Eric Zitzewitz, 2006. "Prediction Markets in Theory and Practice," NBER Working Papers 12083, National Bureau of Economic Research, Inc.
  3. Blaise Gadanecz & Richhild Moessner & Christian Upper, 2007. "Economic derivatives," BIS Quarterly Review, Bank for International Settlements, March.
  4. Edge, Rochelle M & Gürkaynak, Refet S., 2010. "How Useful Are Estimated DSGE Model Forecasts for Central Bankers?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8158, C.E.P.R. Discussion Papers.
  5. Halil Ibrahim Aydin & Ahmet Degerli & Pinar Ozlu, 2010. "Recovering Risk-Neutral Densities from Exchange Rate Options: Evidence in Turkey (Kur Opsiyonlarindan Riske Duyarsiz Yogunluk Fonksiyonu Cikarimi: Turkiye Ornegi)," Working Papers 1003, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  6. Christine Fay & Toni Gravelle, 2010. "Has the Inclusion of Forward-Looking Statements in Monetary Policy Communications Made the Bank of Canada More Transparent?," Discussion Papers 10-15, Bank of Canada.
  7. Roberto Rigobon & Brian Sack, 2006. "Noisy Macroeconomic Announcements, Monetary Policy, and Asset Prices," NBER Working Papers 12420, National Bureau of Economic Research, Inc.
  8. 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.
  9. Markku Lanne, 2009. "Properties of Market-Based and Survey Macroeconomic Forecasts for Different Data Releases," Economics Bulletin, AccessEcon, vol. 29(3), pages 2231-2240.
  10. Lanne, Markku, 2007. "The Properties of Market-Based and Survey Forecasts for Different Data Releases," MPRA Paper 3877, University Library of Munich, Germany.
  11. Alessandro Beber & Michael W. Brandt, 2006. "Resolving Macroeconomic Uncertainty in Stock and Bond Markets," NBER Working Papers 12270, National Bureau of Economic Research, Inc.
  12. Parker, John, 2007. "The Impact Of Economic News On Financial Markets," MPRA Paper 2675, University Library of Munich, Germany.
  13. Justin Wolfers, 2006. "New uses for new macro derivatives," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue aug25.
  14. Kjellberg, David, 2006. "Measuring Expectations," Working Paper Series, Uppsala University, Department of Economics 2006:9, Uppsala University, Department of Economics.

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