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Forward‐Looking Monetary Policy Rules and Option‐Implied Interest Rate Expectations

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  • Jukka Sihvonen
  • Sami Vähämaa

Abstract

This paper examines the association between option‐implied interest rate distributions and macroeconomic expectations in the context of a forward‐looking monetary policy rule. We presume that market participants view the policy rule as a guide to the path of future policy rates and price interest rate options in accordance with the policy rule fundamentals. Using data from the UK, we confirm that Libor expectations implied by option prices are consistent with the policy rule variables. The results demonstrate that changes in the distributional form of Libor expectations are strongly associated with changes in the expected inflation and output gaps and financial uncertainty. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:346–373, 2014

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  • 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.
  • Handle: RePEc:wly:jfutmk:v:34:y:2014:i:4:p:346-373
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    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, arXiv.org.

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