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Extracting market expectations from option prices?

Author

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  • Aron Gereben

    (Reserve Bank of New Zealand)

Abstract

Indicators of market expectations based on option prices are gaining popularity among central banks. The Reserve Bank recently began to use these indicators in financial stability and monetary policy analysis. This article provides a non-technical overview of these techniques and highlights how they might be used, through examples.

Suggested Citation

  • Aron Gereben, 2002. "Extracting market expectations from option prices?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, March.
    • Handle: RePEc:nzb:nzbbul:march2002:5
    as

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    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2002/2002mar65-1Gereben.pdf
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    References listed on IDEAS

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    1. Ian Woolford, 2001. "Macro-financial stability and macroprudential analysis," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, September.
    2. Bhupinder Bahra, 1997. "Implied risk-neutral probability density functions from option prices: theory and application," Bank of England working papers 66, Bank of England.
    3. Aron Gereben, 2002. "Extracting market expectations from option prices: an application to over-the-counter New Zealand dollar options," Reserve Bank of New Zealand Discussion Paper Series DP2002/04, Reserve Bank of New Zealand.
    4. Allan M. Malz, 1997. "Option-implied probability distributions and currency excess returns," Staff Reports 32, Federal Reserve Bank of New York.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Rubinstein, Mark, 1994. "Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
    7. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
    8. Christian Hawkesby, 1999. "A primer on derivatives markets," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, June.
    9. Leo Krippner & Michael Gordon, 2001. "Market expectations of the Official Cash Rate," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, June.
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    Cited by:

    1. Lannoo, Karel & Thomadakis, Apostolos, 2020. "Derivatives in Sustainable Finance," ECMI Papers 29791, Centre for European Policy Studies.
    2. Değerli, Ahmet & Fendoğlu, Salih, 2015. "Reserve option mechanism as a stabilizing policy tool: Evidence from exchange rate expectations," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 166-179.
    3. Datta, Deepa Dhume & Londono, Juan M. & Ross, Landon J., 2017. "Generating options-implied probability densities to understand oil market events," Energy Economics, Elsevier, vol. 64(C), pages 440-457.
    4. Martin Cincibuch & David Vavra, 2004. "Testing for the uncovered interest parity using distributions implied by FX options," Money Macro and Finance (MMF) Research Group Conference 2003 16, Money Macro and Finance Research Group.
    5. Axarloglou, Kostas & Visvikis, Ilias & Zarkos, Stefanos, 2013. "The time dimension and value of flexibility in resource allocation: The case of the maritime industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 52(C), pages 35-48.
    6. Michelle Lewis, 2012. "Market Perceptions of Exchange Rate Risk," Reserve Bank of New Zealand Analytical Notes series AN2012/12, Reserve Bank of New Zealand.
    7. Micahel Gordon & Leslie Hull & Clive Thorp, 2003. "Recent developments in New Zealand's financial stability," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, September.

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