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Assessing central bank credibility during the EMS crises: Comparing option and spot market-based forecasts

  • Haas, Markus
  • Mittnik, Stefan
  • Mizrach, Bruce

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 simulatedmoments 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. In an application to the 1992-93 European Exchange Rate Mechanism crises, that both the options and the underlying exchange rates provide useful information for policy makers.

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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2005/09.

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Date of creation: 2005
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Handle: RePEc:zbw:cfswop:200509
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