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

Jukka Sihvonen, Sami Vähämaa*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

3 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)346-373
Number of pages28
JournalJournal of Futures Markets
Volume34
Issue number4
DOIs
Publication statusPublished - 1 Apr 2014
MoE publication typeA1 Journal article-refereed

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