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Extracting Market Expectations from Option Prices: Case Studies in Japanese Option Markets

Author

Listed:
  • Nakamura, Hisashi

    (Bank of Japan)

  • Shiratsuka, Shigenori

    (Bank of Japan and Federal Reserve Bank of Chicago)

Abstract

This paper focuses on the recently developing financial derivatives markets, and examines the usefulness of option prices as an information variable for monetary policy implementation. A set of option prices provides us with information on the entire probability distribution of the future values of underlying assets. Such information enables us to examine the development of market expectations. The paper estimates a time series of implied probability distributions from daily option prices on stock price index and long-term government bond futures in Japan. The estimation is done for a sample of daily closing prices for the following three periods: (1) the period of a collapsing "bubble" in the stock market in 1989-90; (2) the period of serious stock market slump in 1992-94; and (3) the period of increasing anxiety in the market about a possible deflationary spiral in 1995.

Suggested Citation

  • Nakamura, Hisashi & Shiratsuka, Shigenori, 1999. "Extracting Market Expectations from Option Prices: Case Studies in Japanese Option Markets," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(1), pages 1-43, May.
    • Handle: RePEc:ime:imemes:v:17:y:1999:i:1:p:1-43
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    References listed on IDEAS

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    1. David S. Bates, 1997. "Post-'87 Crash Fears in S&P 500 Futures Options," NBER Working Papers 5894, National Bureau of Economic Research, Inc.
    2. Soderlind, Paul & Svensson, Lars, 1997. "New techniques to extract market expectations from financial instruments," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 383-429, October.
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    7. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-684, November.
    8. Malz, Allan M., 1996. "Using option prices to estimate realignment probabilities in the European Monetary System: the case of sterling-mark," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 717-748, October.
    9. Melick, William R. & Thomas, Charles P., 1997. "Recovering an Asset's Implied PDF from Option Prices: An Application to Crude Oil during the Gulf Crisis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(1), pages 91-115, March.
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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. Halil Ibrahim Aydin & Ahmet Degerli & Pinar Ozlu, 2010. "Recovering Risk-Neutral Densities from Exchange Rate Options: Evidence in Turkey (Kur Opsiyonlarindan Riske Duyarsiz Yogunluk Fonksiyonu Cikarimi: Turkiye Ornegi)," Working Papers 1003, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    3. 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.
    4. Glatzer, Ernst & Scheicher, Martin, 2003. "Modelling the implied probability of stock market movements," Working Paper Series 212, European Central Bank.
    5. Äijö, Janne, 2008. "Impact of US and UK macroeconomic news announcements on the return distribution implied by FTSE-100 index options," International Review of Financial Analysis, Elsevier, vol. 17(2), pages 242-258.
    6. Takkabutr, Nattapol, 2013. "Option-Implied Risk Aversion Anomalies: Evidence From Japanese Market," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 54(2), pages 137-157, December.
    7. Steven A. Weinberg, 2001. "Interpreting the volatility smile: an examination of the information content of option prices," International Finance Discussion Papers 706, Board of Governors of the Federal Reserve System (U.S.).
    8. Marie Briere, 2006. "Market Reactions to Central Bank Communication Policies :Reading Interest Rate Options Smiles," Working Papers CEB 38, ULB -- Universite Libre de Bruxelles.

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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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