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Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk
Refet S. Gurkaynak
Bilkent University - Department of Economics
Justin Wolfers
University of Michigan at Ann Arbor - Department of Economics; The Ford School of Public Policy, University of Michigan; The Brookings Institution; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Kiel Institute for the World Economy
January 2006
NBER Working Paper No. w11929
Abstract:
In September 2002, a new market in %u201CEconomic Derivatives%u201D was launched allowing traders to take positions on future values of several macroeconomic data releases. We provide an initial analysis of the prices of these options. We find that market-based measures of expectations are similar to survey-based forecasts although the market-based measures somewhat more accurately predict financial market responses to surprises in data. These markets also provide implied probabilities of the full range of specific outcomes, allowing us to measure uncertainty, assess its driving forces, and compare this measure of uncertainty with the dispersion of point-estimates among individual forecasters (a measure of disagreement). We also assess the accuracy of market-generated probability density forecasts. A consistent theme is that few of the behavioral anomalies present in surveys of professional forecasts survive in equilibrium, and that these markets are remarkably well calibrated. Finally we assess the role of risk, finding little evidence that risk-aversion drives a wedge between market prices and probabilities in this market.
Number of Pages in PDF File: 45
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Date posted: April 13, 2006
Suggested CitationGurkaynak, Refet S. and Wolfers, Justin, Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk (January 2006). NBER Working Paper No. w11929. Available at SSRN: http://ssrn.com/abstract=876032
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