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Market Expectations in the UK before and after the ERM Crisis

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  • Soderlind, Paul

Abstract

The 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 mark-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. Copyright 2000 by The London School of Economics and Political Science

Suggested Citation

  • 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.
  • Handle: RePEc:bla:econom:v:67:y:2000:i:265:p:1-18
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    Cited by:

    1. Vahamaa, Sami, 2005. "Option-implied asymmetries in bond market expectations around monetary policy actions of the ECB," Journal of Economics and Business, Elsevier, vol. 57(1), pages 23-38.
    2. Cho-Hoi Hui & Tsz-Kin Chung & Chi-Fai Lo, 2013. "Using Interest Rate Derivative Prices to Estimate LIBOR-OIS Spread Dynamics and Systemic Funding Liquidity Shock Probabilities," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(2), pages 131-146, May.
    3. Bondarenko, Oleg, 2003. "Estimation of risk-neutral densities using positive convolution approximation," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 85-112.
    4. Robert R Bliss & Nikolaos Panigirtzoglou, 2000. "Testing the stability of implied probability density functions," Bank of England working papers 114, Bank of England.
    5. Gustavo Abarca & José Gonzalo Rangel & Guillermo Benavides, 2010. "Exchange Rate Market Expectations and Central Bank Policy: The case of the Mexican Peso-US Dollar from 2005-2009," Working Papers 2010-17, Banco de México.
    6. 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.
    7. Anthony Tay & Kenneth F. Wallis, 2000. "Density Forecasting: A Survey," Econometric Society World Congress 2000 Contributed Papers 0370, Econometric Society.
    8. Inci, Ahmet Can, 2005. "ERM effects on currency spot and futures markets," Global Finance Journal, Elsevier, vol. 16(2), pages 145-163, December.
    9. Urban J. Jermann, 2016. "Financial Markets’ Views about the Euro-Swiss Franc Floor," NBER Working Papers 21977, National Bureau of Economic Research, Inc.
    10. Andersson, Magnus & Lomakka, Magnus, 2005. "Evaluating implied RNDs by some new confidence interval estimation techniques," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1535-1557, June.
    11. Martin Mandler, 2002. "Extracting Market Expectations from Option Prices: Two Case Studies in Market Perceptions of the ECB's Monetary Policy 1999/2000," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(II), pages 165-189, June.
    12. Cho-Hoi Hui & Chi-Fai Lo & Tsz-Kin Chung, 2008. "Market Expectation of Appreciation of the Renminbi," Working Papers 0803, Hong Kong Monetary Authority.
    13. Cappiello, Lorenzo & De Santis, Roberto A., 2005. "Explaining exchange rate dynamics: the uncovered equity return parity condition," Working Paper Series 529, European Central Bank.
    14. Ruijun Bu & Kaddour Hadri, 2005. "Estimating the Risk Neutral Probability Density Functions Natural Spline versus Hypergeometric Approach Using European Style Options," Research Papers 200510, University of Liverpool Management School.

    More about this item

    JEL classification:

    • 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

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