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
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: Suggested Citation
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