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

CFS Working Paper No. 2005/09

45 Pages Posted: 19 Apr 2005

See all articles by Markus Haas

Markus Haas

University of Kiel - Faculty of Economics and Social Sciences

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics; Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Bruce Mizrach

Rutgers University, Department of Economics

Date Written: February 2005

Abstract

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. 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.

Keywords: Options, Implied Probability Densities, GARCH, Fat-Tails, Exchange Rate Mechanism

JEL Classification: G12, G14, F31

Suggested Citation

Haas, Markus and Mittnik, Stefan and Mizrach, Bruce, Assessing Central Bank Credibility During the Erm Crises: Comparing Option and Spot Market-Based Forecasts (February 2005). CFS Working Paper No. 2005/09, Available at SSRN: https://ssrn.com/abstract=701190 or http://dx.doi.org/10.2139/ssrn.701190

Markus Haas

University of Kiel - Faculty of Economics and Social Sciences ( email )

Kiel
Germany

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics ( email )

Olshausenstr. 40
Kiel, Schleswig-Holstein 24118
Germany

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Akademiestr.1/III
Munich, D-80539
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Bruce Mizrach (Contact Author)

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States
(848) 932-8636 (Phone)
(732) 932-7416 (Fax)

HOME PAGE: http://snde.rutgers.edu/

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