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

Markus Haas (), Stefan Mittnik () and Bruce Mizrach ()
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Stefan Mittnik: University of Munich
Bruce Mizrach: Rutgers University

Departmental Working Papers from Rutgers University, Department of Economics

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. We find, in an application to the ERM crises of 1992-93, that both the options and the underlying exchange rates provide useful information for policy makers.

Keywords: options; implied probability densities; GARCH; fat-tails; European Monetary System (search for similar items in EconPapers)
JEL-codes: G12 G14 F31 (search for similar items in EconPapers)
Date: 2004-10-12
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ftp://snde.rutgers.edu/Rutgers/wp/2004-24.pdf (application/pdf)

Related works:
Working Paper: Assessing Central Bank Credibility During the ERM Crises: Comparing Option and Spot Market-Based Forecasts (2005)
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:rut:rutres:200424

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