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Assessing Central Bank Credibility During the EMS Crises: Comparing Option and Spot Market-Based Forecasts

  • Markus Haas


    (University of Munich)

  • Stefan Mittnik


    (University of Munich)

  • Bruce Mizrach


    (Rutgers University)

Financial markets embed expectations of central bank policy into asset prices. This paper compares two approaches that extract a probability density of market beliefs. The first is a simulated moments estimator for option volatilities described in Mizrach (2002); the second is a new approach developed by Haas, Mittnik and Paolella (2004a) for fat-tailed conditionally heteroskedastic time series. We find, in an application to the ERM crises of 1992-93, that both the options and the underlying exchange rates provide useful information for policy makers.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200424.

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Length: 20 pages
Date of creation: 12 Oct 2004
Date of revision:
Publication status: Published in Journal of Financial Stability 2, 2006, 28-54
Handle: RePEc:rut:rutres:200424
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