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Interest rate forecasts, state price densities and risk premium from Euribor options

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  • Ivanova, Vesela
  • Puigvert Gutiérrez, Josep Maria

Abstract

In this paper we study option-implied interest rate forecasts and the development of risk premium and state prices in the Euribor futures option market. Using parametric and non-parametric statistical calibration, we transform the risk-neutral option implied densities for the Euribor futures rate into real-world densities. We investigate the period from the introduction of the Euro in 1999 until December 2012. The estimated densities are used to provide a measure for the interest rate risk premium and state prices implicit in the futures market. We find that the real-world option-implied distributions can be used to forecast the futures rate, while the forecasting ability of the risk-neutral distributions is rejected. The state price densities in the market show a U-shaped curve suggesting that investors price higher states with high and low rates compared to the expected spot rate. However, we show that, in general, state prices have a more pronounced right tail, implying that investors are more risk averse to increasing interest rates. We also document a negative market price of interest rate risk which generates positive premium for the futures contract.

Suggested Citation

  • Ivanova, Vesela & Puigvert Gutiérrez, Josep Maria, 2014. "Interest rate forecasts, state price densities and risk premium from Euribor options," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 210-223.
  • Handle: RePEc:eee:jbfina:v:48:y:2014:i:c:p:210-223
    DOI: 10.1016/j.jbankfin.2014.03.028
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael Funke & Julius Loermann & Richhild Moessner, 2017. "The discontinuation of the EUR/CHF minimum exchange rate in January 2015: was it expected?," BIS Working Papers 652, Bank for International Settlements.
    2. repec:oup:erevae:v:45:y:2018:i:1:p:121-142. is not listed on IDEAS
    3. Ricardo Crisostomo & Lorena Couso, 2018. "Financial density forecasts: A comprehensive comparison of risk-neutral and historical schemes," Papers 1801.08007, arXiv.org, revised May 2018.

    More about this item

    Keywords

    Euribor futures; Forecast density; Interest rate premium; State price densities;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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