Extracting Market Expectations from Option Prices: Two Case Studies in Market Perceptions of the ECB's Monetary Policy 1999/2000
Schweizerische Zeitschrift für Volkswirtschaft und Statistik / Revue Suisse d'Economie politique et de Statistique / Swiss Journal of Economics and Statistics, Volume 138, Issue 2, 2002, Pages 165-189
Keywords
interest rate futures options, implied risk-neutral probability density functions, market expectations, monetary policy
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.