Market Expectations in the UK Before and After the ERM Crisis
AbstractThe British pound left the ERM on 16 September 1992 after a period of turbulence. UK monetary policy soon shifted to lower short interest rates and an inflation target was announced. This paper uses daily option prices to estimate how the market's probability distribution of the future marks/pound exchange rate and UK and German interest rates changed over the summer and autumn of 1992. The results show, among other things, how various policy decisions affected the market's assessment of the probabilities of realignments and lending rate cuts.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 210.
Length: 25 pages
Date of creation: 08 Dec 1997
Date of revision: 01 Sep 1998
Publication status: Published in Economica, 2000, pages 1-18.
Note: Old title: Extracting Expectations about UK Monetary Policy 1992 from Option Prices
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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
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Interest rates; exchange rates; futures; options; risk neutral distribution;
Other versions of this item:
- Soderlind, Paul, 2000. "Market Expectations in the UK before and after the ERM Crisis," Economica, London School of Economics and Political Science, vol. 67(265), pages 1-18, February.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-03-30 (All new papers)
- NEP-EEC-1999-03-29 (European Economics)
- NEP-IFN-1999-03-29 (International Finance)
- NEP-MON-1999-03-29 (Monetary Economics)
- NEP-PKE-1999-03-08 (Post Keynesian Economics)
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- Hui, C.H. & Lo, C.F., 2009. "A note on estimating realignment probabilities - A first-passage-time approach," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 804-812, September.
- Bondarenko, Oleg, 2003. "Estimation of risk-neutral densities using positive convolution approximation," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 85-112.
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