Options-Implied Probability Density Functions for Real Interest Rates

Jonathan Wright

International Journal of Central Banking, 2016, vol. 12, issue 3, 129-149

Abstract: This paper constructs options-implied probability density functions for real interest rates. These use options on TIPS, which were launched in 2009. Data availability limits us to studying short-maturity probability density functions for intermediate- to long-term TIPS yields. The PDFs imply high uncertainty about real rates. I also estimate empirical pricing kernels using these option prices along with time-series models fitted to real interest rates. The empirical pricing kernel implies that investors have high marginal utility in states of the world with high real rates.

Date: 2016
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