Option-Implied Asymmetries in Bond Market Expectations Around Monetary Policy Actions of the ECB

38 Pages Posted: 18 May 2004

Date Written: March 2004

Abstract

This paper uses data on German government bond futures options to examine the behaviour of market expectations around monetary policy actions of the European Central Bank (ECB). In particular, this paper focuses on the asymmetries in bond market expectations, as measured by the skewness of option-implied probability distributions of future bond yields. The results show that market expectations are systematically asymmetric around monetary policy actions of the ECB. Around monetary policy tightening, option-implied yield distributions are positively skewed, indicating that market participants attach higher probabilities for sharp yield increases than for sharp decreases. Correspondingly, around loosening of the policy, implied yield distributions are negatively skewed, suggesting that markets assign higher probabilities for sharp yield decreases than for increases.

Furthermore, the results indicate that market expectations are significantly altered around monetary policy actions, as asymmetries in market expectations tend to increase before changes in the monetary policy stance, and to decrease afterwards.

Keywords: market expectations, asymmetries, implied skewness, monetary policy

JEL Classification: E44, E52, G10, G13

Suggested Citation

Vähämaa, Sami, Option-Implied Asymmetries in Bond Market Expectations Around Monetary Policy Actions of the ECB (March 2004). ECB Working Paper No. 315. Available at SSRN: https://ssrn.com/abstract=515079

Sami Vähämaa (Contact Author)

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
316
rank
90,313
Abstract Views
2,577
PlumX Metrics