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

Journal of Futures Markets, Vol. 34, No. 4, pp. 346-373, 2014

51 Pages Posted: 25 Mar 2010 Last revised: 19 Dec 2015

Date Written: November 8, 2012

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.

Keywords: interest rate expectations, implied probability distributions, forward-looking monetary policy rules, Taylor rules

JEL Classification: E43, E44, E52, E58, G13

Suggested Citation

Sihvonen, Jukka and Vähämaa, Sami, Forward-Looking Monetary Policy Rules and Option-Implied Interest Rate Expectations (November 8, 2012). Journal of Futures Markets, Vol. 34, No. 4, pp. 346-373, 2014. Available at SSRN: https://ssrn.com/abstract=1574746 or http://dx.doi.org/10.2139/ssrn.1574746

Jukka Sihvonen (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Sami Vähämaa

University of Vaasa ( email )

P.O. Box 700
Vaasa, FI-65101
Finland
+358 29 449 8455 (Phone)

HOME PAGE: http://www.uva.fi/~sami

Register to save articles to
your library

Register

Paper statistics

Downloads
329
Abstract Views
1,493
rank
91,796
PlumX Metrics