Zero Lower Bound Risk according to Option Prices

Michael Bauer and Thomas Mertens

FRBSF Economic Letter, 2019

Abstract: Interest rate derivatives?financial investments whose value depends on interest rates?provide useful information about the risk of short-term rates falling again to the zero lower bound. According to new market-based estimates, the probability of a return to the lower bound by the end of 2021 is about 24%. This is roughly in line with other survey-based and model-based estimates of zero lower bound risk. In recent months, the market-based measure of lower bound risk has increased markedly.

Date: 2019
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