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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Bruce Mizrach: Rutgers University
Departmental Working Papers from Rutgers University, Department of Economics
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)
Pages: 20 pages
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Published in Journal of Financial Stability 2, 2006, 28-54
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Journal Article: Assessing central bank credibility during the ERM crises: Comparing option and spot market-based forecasts (2006)
Working Paper: Assessing central bank credibility during the EMS crises: Comparing option and spot market-based forecasts (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:200424
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