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Expectations of monetary policy in Australia implied by the probability distribution of interest rate derivatives

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  • Ramaprasad Bhar
  • Carl Chiarella

Abstract

The paper describes and compares different methods of extracting the implied probability distribution of the underlying interest rate futures from the prices of traded options on these futures as well as from past futures prices. These methods are applied to short-term contracts on bank accepted bills trading on the Sydney Futures Exchange. The information on the distribution of the underlying asset thus obtained is very important to the central bank authorities since this allows them to monitor market expectations regarding future price movements. Alternatively market reaction to central, bank monetary policy changes may be judged this way. It is also important to practitioners for use in pricing over the counter (OTC) or exotic products where the trading volume is not particularly high. In that situation, the information on the distribution recovered from highly traded products from the exchange may be used as representative for the OTC products as well. As an empirical application, the recovered information on distribution is analysed in the context of reductions in interest rates in Australia by the Reserve Bank between July 1996 and May 1997.

Suggested Citation

  • Ramaprasad Bhar & Carl Chiarella, 2000. "Expectations of monetary policy in Australia implied by the probability distribution of interest rate derivatives," The European Journal of Finance, Taylor & Francis Journals, vol. 6(2), pages 113-125.
    • Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:113-125
    DOI: 10.1080/13518470050020798
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    References listed on IDEAS

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    Cited by:

    1. Halil Ibrahim Aydin & Ahmet Degerli & Pinar Ozlu, 2010. "Recovering Risk-Neutral Densities from Exchange Rate Options: Evidence in Turkey (Kur Opsiyonlarindan Riske Duyarsiz Yogunluk Fonksiyonu Cikarimi: Turkiye Ornegi)," Working Papers 1003, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    2. Marins, Jaqueline Terra Moura & Vicente, José Valentim Machado, 2017. "Do the central bank actions reduce interest rate volatility?," Economic Modelling, Elsevier, vol. 65(C), pages 129-137.
    3. Jukka Sihvonen & Sami Vähämaa, 2014. "Forward‐Looking Monetary Policy Rules and Option‐Implied Interest Rate Expectations," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(4), pages 346-373, April.
    4. Roberto Casarin & Fabrizio Leisen & German Molina & Enrique ter Horst, 2014. "A Bayesian Beta Markov Random Field Calibration of the Term Structure of Implied Risk Neutral Densities," Papers 1409.1956, arXiv.org.
    5. Vahamaa, Sami, 2005. "Option-implied asymmetries in bond market expectations around monetary policy actions of the ECB," Journal of Economics and Business, Elsevier, vol. 57(1), pages 23-38.
    6. Schmitz, Jochen & Ledebur, Oliver von, 2012. "The 2007 emerging corn price surge revisited – Was it expected or a large surprise?," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 123971, International Association of Agricultural Economists.

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