Extracting market expectations from option prices: case studies in Japanese option markets
AbstractThis paper focuses on the recently developing financial derivatives markets, and examines the usefulness of option prices as an information variable for monetary policy implementation. A set of option prices provides us with information on the whole probability distribution of the future values of underlying assets. Such information enables us to examine the development of market expectations. The paper estimates a time series of implied probability distributions from daily option prices on stock prices and long term government bond futures. The estimation is done for a sample of daily closing prices for the following three periods: (I) the period of a collapsing bubble in the stock market in 1989-90; (ii) the period of serious stock market slump in 1992-94; and (iii) the period of increasing anxiety in the market about a possible deflationary spiral in 1995.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-99-1.
Date of creation: 1999
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Other versions of this item:
- Nakamura, Hisashi & Shiratsuka, Shigenori, 1999. "Extracting Market Expectations from Option Prices: Case Studies in Japanese Option Markets," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 1-43, May.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-05-03 (All new papers)
- NEP-FIN-1999-05-03 (Finance)
- NEP-FMK-1999-05-03 (Financial Markets)
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