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Forward‐Looking Monetary Policy Rules and Option‐Implied Interest Rate Expectations
Author(s) -
Sihvonen Jukka,
Vähämaa Sami
Publication year - 2014
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21596
Subject(s) - libor , economics , interest rate , monetary policy , inflation (cosmology) , libor market model , context (archaeology) , financial economics , econometrics , monetary economics , paleontology , physics , theoretical physics , biology
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