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

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: F31 G12 G14 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2004-10-12
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Citations: View citations in EconPapers (4)

Published in Journal of Financial Stability 2, 2006, 28-54

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http://www.sas.rutgers.edu/virtual/snde/wp/2004-24.pdf (application/pdf)

Related works:
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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