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Forward‐Looking Monetary Policy Rules and Option‐Implied Interest Rate Expectations

Jukka Sihvonen and Sami Vähämaa ()

Journal of Futures Markets, 2014, vol. 34, issue 4, 346-373

Abstract: This paper examines the association between option‐implied interest rate distributions and macroeconomic expectations in the context of a forward‐looking monetary policy rule. We presume that market participants view the policy rule as a guide to the path of future policy rates and price interest rate options in accordance with the policy rule fundamentals. Using data from the UK, we confirm that Libor expectations implied by option prices are consistent with the policy rule variables. The results demonstrate that changes in the distributional form of Libor expectations are strongly associated with changes in the expected inflation and output gaps and financial uncertainty. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:346–373, 2014

Date: 2014
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