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Zero Lower Bound Risk according to Option Prices

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  • Michael D. Bauer
  • Thomas M. Mertens

Abstract

Interest rate derivatives?financial investments whose value depends on interest rates?provide useful information about the risk of short-term rates falling again to the zero lower bound. According to new market-based estimates, the probability of a return to the lower bound by the end of 2021 is about 24%. This is roughly in line with other survey-based and model-based estimates of zero lower bound risk. In recent months, the market-based measure of lower bound risk has increased markedly.

Suggested Citation

  • Michael D. Bauer & Thomas M. Mertens, 2019. "Zero Lower Bound Risk according to Option Prices," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfel:00204
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