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Journal of Financial Stability Vol. 2 No. 1 2006

Assessing central bank credibility during the ERM crises: Comparing option and spot market-based forecasts

Markus Haas1; Stefan Mittnik2,3; Bruce Mizrach4

1 Institute of Statistics, University of Munich, Germany · 2 Goethe University Frankfurt · 3 Ifo Institute for Economic Research · 4 Rutgers, The State University of New Jersey

Abstract

Financial markets embed expectations of central bank policy into asset prices. This paper compares two approaches that extract a probability density of market beliefs. The first is a simulated moments estimator for option volatilities described in [Mizrach, B., 2002. When Did the Smart Money in Enron Lose Its’ Smirk? Rutgers University Working Paper #2002-24]; the second is a new approach developed by [Haas, M., Mittnik, S., Paolella, M.S., 2004a. Mixed normal conditional heteroskedasticity, J. Financial Econ. 2, 211–250] for fat-tailed conditionally heteroskedastic time series. In an application to the 1992–1993 European Exchange Rate Mechanism crises, we find that both the options and the underlying exchange rates provide useful information for policy makers.

DOI
10.1016/j.jfs.2005.02.012
Volume
2
Issue
1
Pages
28-54
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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