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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 210:
Market Expectations in the UK Before and After the ERM Crisis

Paul Söderlind ()

Abstract: The British pound left the ERM on 16 September 1992 after a period of turbulence. UK monetary policy soon shifted to lower short interest rates and an inflation target was announced. This paper uses daily option prices to estimate how the market's probability distribution of the future marks/pound exchange rate and UK and German interest rates changed over the summer and autumn of 1992. The results show, among other things, how various policy decisions affected the market's assessment of the probabilities of realignments and lending rate cuts.

Keywords: Interest rates; exchange rates; futures; options; risk neutral distribution; (follow links to similar papers)

JEL-Codes: E43; E52; G13; (follow links to similar papers)

25 pages, December 8, 1997, Revised March 19, 1999

Old title: Extracting Expectations about UK Monetary Policy 1992 from Option Prices

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This paper is published as:
Soderlind, Paul, (2000), 'Market Expectations in the UK Before and After the ERM Crisis', Economica, Vol. 67, pages 1-18



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