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Extracting Market Expectations from Option Prices: Two Case Studies in Market Perceptions of the ECB's Monetary Policy 1999/2000

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  • Martin Mandler

Abstract

In recent years various different techniques to uncover the information on market expectations contained in option prices have been developed. This paper applies the technique of fitting a mixture of lognormal densities to LIFFE Euribor futures options to estimate the risk-neutral implied probability density function for the future level of interest rates. Two sets of option prices are considered which cover the ECB's increases in official interest rates in November and February. The results are found to be consistent with market comment prevailing at that time.

Suggested Citation

  • 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.
    • Handle: RePEc:ses:arsjes:2002-ii-4
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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.

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    More about this item

    Keywords

    interest rate futures options; implied risk-neutral probability density functions; market expectations; monetary policy;
    All these keywords.

    JEL classification:

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

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