IDEAS home Printed from https://ideas.repec.org/a/ime/imemes/v19y2001i3p143-170.html
   My bibliography  Save this article

Information Content of Implied Probability Distributions: Empirical Studies of Japanese Stock Price Index Options

Author

Listed:
  • Shiratsuka, Shigenori

    (Institute for Monetary & Econ Studies, Bank of Japan)

Abstract

Empirical studies of the information content of option prices have focused on exploring whether implied volatility contains useful information regarding the future fluctuation of underlying asset prices. If expectation formation in the option markets reflects all the currently available information regarding future price movements, option prices will be useful in forecasting the price fluctuation of underlying assets. This paper extends such an analytical framework to implied probability distribution as a whole and examines its information content by using Japanese stock price index option data (on a daily basis) from mid-1989 to mid-1996. To this end, the following questions are examined: (1) whether the implied probability distribution is a good forecast of the subsequently realized distribution of stock price fluctuations, and (2) whether a leads and lags relationship exists between stock price changes and changes in the shape of the implied probability distribution. The estimation results show that (1) the implied probability distribution contains some information regarding future price movements, but its forecasting ability is not superior to that of the historical distribution, and (2) the shape of the implied probability distribution not only responds to stock price changes but also contains some information on forecasting stock price changes. However, it should be noted that such results are highly sensitive to the choice of sample period, suggesting that the information content depends on macroeconomic and financial market conditions. Therefore, the information contained in an implied probability distribution is difficult to interpret automatically as an information variable for monetary policy, and further studies are needed on how to make use of information contained in implied probability distributions.

Suggested Citation

  • Shiratsuka, Shigenori, 2001. "Information Content of Implied Probability Distributions: Empirical Studies of Japanese Stock Price Index Options," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(3), pages 143-170, November.
  • Handle: RePEc:ime:imemes:v:19:y:2001:i:3:p:143-170
    as

    Download full text from publisher

    File URL: http://www.imes.boj.or.jp/research/papers/english/me19-3-5.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters,in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
    2. Hsiao, Cheng & Fujiki, Hiroshi, 1998. "Nonstationary Time-Series Modeling versus Structural Equation Modeling: With an Application to Japanese Money Demand," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(1), pages 57-79, May.
    3. Koichiro Kamada & Ichiro Muto, 2000. "Forward-looking Models and Monetary Policy in Japan," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    4. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters,in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
    5. J. Bradford DeLong, 1999. "Should We Fear Deflation?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 225-252.
    6. Allan Crawford, 1998. "Measurement biases in the Canadian CPI: An update," Bank of Canada Review, Bank of Canada, vol. 1998(Spring), pages 39-56.
    7. Orazio P. Attanasio & Luigi Guiso & Tullio Jappelli, 2002. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Household Data," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 317-351, April.
    8. Lawrence H. Summers, 1991. "Panel discussion: price stability ; How should long-term monetary policy be determined?," Proceedings, Federal Reserve Bank of Cleveland, pages 625-631.
    9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    10. Balke, Nathan S. & Wynne, Mark A., 2000. "An equilibrium analysis of relative price changes and aggregate inflation," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 269-292, April.
    11. Fujiki, Hiroshi & Okina, Kunio & Shiratsuka, Shigenori, 2001. "Monetary Policy under Zero Interest Rate: Viewpoints of Central Bank Economists," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(1), pages 89-130, February.
    12. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-261, March.
    13. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", pages 125-132.
    14. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    15. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 161-193.
    16. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
    17. Martin Feldstein, 1999. "Introduction to "Costs and Benefits of Price Stability, The"," NBER Chapters,in: The Costs and Benefits of Price Stability, pages 1-8 National Bureau of Economic Research, Inc.
    18. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
    19. Hans-Werner Sinn, 1999. "Inflation and Welfare: Comment on Robert Lucas," NBER Working Papers 6979, National Bureau of Economic Research, Inc.
    20. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters,in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
    21. Hoffmann, Johannes, 1998. "Problems of inflation measurement in Germany," Discussion Paper Series 1: Economic Studies 1998,01e, Deutsche Bundesbank.
    22. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
    23. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    24. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    25. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 625-631, August.
    26. Alastair Cunningham, 1996. "Measurement Bias in Price Indices: An Application to the UK's RPI," Bank of England working papers 47, Bank of England.
    27. Martin Feldstein, 1999. "The Costs and Benefits of Price Stability," NBER Books, National Bureau of Economic Research, Inc, number feld99-1, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:eee:eneeco:v:64:y:2017:i:c:p:440-457 is not listed on IDEAS
    2. Robert R Bliss & Nikolaos Panigirtzoglou, 2000. "Testing the stability of implied probability density functions," Bank of England working papers 114, Bank of England.
    3. Wilkens, Sascha & Roder, Klaus, 2006. "The informational content of option-implied distributions: Evidence from the Eurex index and interest rate futures options market," Global Finance Journal, Elsevier, vol. 17(1), pages 50-74, September.
    4. Bliss, Robert R. & Panigirtzoglou, Nikolaos, 2002. "Testing the stability of implied probability density functions," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 381-422, March.
    5. Birru, Justin & Figlewski, Stephen, 2012. "Anatomy of a meltdown: The risk neutral density for the S&P 500 in the fall of 2008," Journal of Financial Markets, Elsevier, vol. 15(2), pages 151-180.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ime:imemes:v:19:y:2001:i:3:p:143-170. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken). General contact details of provider: http://edirc.repec.org/data/imegvjp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.