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Expectations of monetary policy in Australia implied by the probability distribution of interest rate derivatives


  • Ramaprasad Bhar
  • Carl Chiarella


The paper describes and compares different methods of extracting the implied probability distribution of the underlying interest rate futures from the prices of traded options on these futures as well as from past futures prices. These methods are applied to short-term contracts on bank accepted bills trading on the Sydney Futures Exchange. The information on the distribution of the underlying asset thus obtained is very important to the central bank authorities since this allows them to monitor market expectations regarding future price movements. Alternatively market reaction to central, bank monetary policy changes may be judged this way. It is also important to practitioners for use in pricing over the counter (OTC) or exotic products where the trading volume is not particularly high. In that situation, the information on the distribution recovered from highly traded products from the exchange may be used as representative for the OTC products as well. As an empirical application, the recovered information on distribution is analysed in the context of reductions in interest rates in Australia by the Reserve Bank between July 1996 and May 1997.

Suggested Citation

  • Ramaprasad Bhar & Carl Chiarella, 2000. "Expectations of monetary policy in Australia implied by the probability distribution of interest rate derivatives," The European Journal of Finance, Taylor & Francis Journals, vol. 6(2), pages 113-125.
  • Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:113-125 DOI: 10.1080/13518470050020798

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    References listed on IDEAS

    1. C. Steven Cole & Michael Impson & William Reichenstein, 1991. "Do treasury bill futures rates satisfy rational expectation properties?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(5), pages 591-601, October.
    2. Buchen, Peter W. & Kelly, Michael, 1996. "The Maximum Entropy Distribution of an Asset Inferred from Option Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 143-159, March.
    3. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305 World Scientific Publishing Co. Pte. Ltd..
    4. Stutzer, Michael, 1996. " A Simple Nonparametric Approach to Derivative Security Valuation," Journal of Finance, American Finance Association, vol. 51(5), pages 1633-1652, December.
    5. Heynen, Ronald & Kemna, Angelien & Vorst, Ton, 1994. "Analysis of the Term Structure of Implied Volatilities," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(01), pages 31-56, March.
    6. Xu, Xinzhong & Taylor, Stephen J., 1994. "The Term Structure of Volatility Implied by Foreign Exchange Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(01), pages 57-74, March.
    7. Peter A. Abken & Dilip B. Madan & Buddhavarapu Sailesh Ramamurtie, 1996. "Estimation of risk-neutral and statistical densities by Hermite polynomial approximation: with an application to Eurodollar futures options," FRB Atlanta Working Paper 96-5, Federal Reserve Bank of Atlanta.
    8. Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
    9. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
    10. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
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    Cited by:

    1. Roberto Casarin & Fabrizio Leisen & German Molina & Enrique ter Horst, 2014. "A Bayesian Beta Markov Random Field Calibration of the Term Structure of Implied Risk Neutral Densities," Papers 1409.1956,
    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. repec:eee:ecmode:v:65:y:2017:i:c:p:129-137 is not listed on IDEAS
    4. 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.
    5. Jukka Sihvonen & Sami Vähämaa, 2014. "Forward‐Looking Monetary Policy Rules and Option‐Implied Interest Rate Expectations," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(4), pages 346-373, April.
    6. Vähämaa, Sami, 2004. "Option-implied asymmetries in bond market expectations around monetary policy actions of the ECB," Working Paper Series 315, European Central Bank.
    7. Schmitz, Jochen & Ledebur, Oliver von, 2012. "The 2007 emerging corn price surge revisited – Was it expected or a large surprise?," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 123971, International Association of Agricultural Economists.


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