Seminar Papers, Institute for International Economic Studies, Stockholm University
No 621:
New Techniques to Extract Market Expectations from Financial Instruments
Paul Söderlind ()
and Lars E.O. Svensson ()
Abstract: This paper is a selective survey of new or recent methods
to extract information about market expectations from asset prices for
monetary policy purposes. We shall discuss methods to extract market
expectations of future interest rates, exchange rates and inflation rates.
Traditionally, interest rates and forward exchange rates have been used to
extract expected means of future interest rates, exchange rates and
inflation. More recently, these methods have been refined to rely on
implied forward exchange rates, so as to extract expected future time-paths
of interest rates, exchange rates and inflatione rates. Very recently,
methods have been designed to extract not only means but the whole (risk
neutral) probability distribution of future interest rates and exchange
rates from a set of option prices.
More developed and deeper financial
markets, increased international financial integration, and new financial
instruments are preconditions for these methods. The survey also reports on
available instruments and their suitability for different purposes and
methods.
Keywords: Market expectations; interest rates; exchange rates; inflation rates; asset prices; (follow links to similar papers)
JEL-Codes: E43; E52; (follow links to similar papers)
47 pages, October 30, 1997
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