Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty and Risk

47 Pages Posted: 3 May 2006

See all articles by Justin Wolfers

Justin Wolfers

University of Michigan at Ann Arbor - Department of Economics; University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; The University of Sydney - Discipline of Economics; Brookings Institution - Economic Studies Program; Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Kiel Institute for the World Economy

Refet S. Gürkaynak

Bilkent University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 2006

Abstract

September 2002, a new market in 'Economic Derivatives' 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 behavioural 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.

Keywords: Density forecasts, disagreement, economic derivatives, expectations, forecasting, macroeconomic surveys, prediction markets, surveys, uncertainty

JEL Classification: C5, C82, D8, E3, G14

Suggested Citation

Wolfers, Justin and Gürkaynak, Refet S., Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty and Risk (January 2006). CEPR Discussion Paper No. 5466, Available at SSRN: https://ssrn.com/abstract=900392

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Refet S. Gürkaynak

Bilkent University - Department of Economics ( email )

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