Measuring Uncertainty in Monetary Policy Using Implied Volatility and Realized Volatility

Bo Young Chang and Bruno Feunou

Staff Working Papers from Bank of Canada

Abstract: We measure uncertainty surrounding the central bank’s future policy rates using implied volatility computed from interest rate option prices and realized volatility computed from intraday prices of interest rate futures. Both volatility measures show that uncertainty decreased following the most important policy actions taken by the Bank of Canada as a response to the financial crisis of 2007-08, such as the conditional commitment of 2009-10, the unscheduled cut in the target rate coordinated with other major central banks, and the introduction of term purchase and resale agreements. We also find that, on average, uncertainty decreases following the Bank of Canada’s policy rate announcements. Furthermore, our measures of policy rate uncertainty improve the estimation of policy rate expectations from overnight index swap (OIS) rates by predicting the risk premium in the OIS market.

Keywords: Credit and credit aggregates; Financial markets (search for similar items in EconPapers)
JEL-codes: E4 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:13-37

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