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Assessing central bank credibility during the ERM crises: Comparing option and spot market-based forecasts

  • Haas, Markus
  • Mittnik, Stefan
  • Mizrach, Bruce

Financial markets embed expectations of central bank policy into asset prices. This paper compares two approaches that extract a probability density of market beliefs. The first is a simulatedmoments estimator for option volatilities described in Mizrach (2002); the second is a new approach developed by Haas, Mittnik and Paolella (2004a) for fat-tailed conditionally heteroskedastic time series. In an application to the 1992-93 European Exchange Rate Mechanism crises, that both the options and the underlying exchange rates provide useful information for policy makers.

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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 2 (2006)
Issue (Month): 1 (April)
Pages: 28-54

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Handle: RePEc:eee:finsta:v:2:y:2006:i:1:p:28-54
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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