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

Markus Haas (), Stefan Mittnik and Bruce Mizrach ()
Additional contact information
Stefan Mittnik: University of Munich
Bruce Mizrach: Rutgers University, http://snde.rutgers.edu

No 2005/09, CFS Working Paper Series from Center for Financial Studies

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 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.

Keywords: Options; Implied Probability Densities; GARCH; Fat-tails; Exchange Rate Mechanism (search for similar items in EconPapers)
JEL-codes: G12 G14 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-fin, nep-fmk, nep-for, nep-ifn and nep-mon
Date: 2005-01-09
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Related works:
Working Paper: Assessing Central Bank Credibility During the EMS Crises: Comparing Option and Spot Market-Based Forecasts (2004)
Journal Article: Assessing central bank credibility during the ERM crises: Comparing option and spot market-based forecasts (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:cfs:cfswop:wp200509

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