Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 142: New Techniques to Extract Market expectations from Financial Instruments

Paul Söderlind () and Lars E.O. Svensson ()
Additional contact information
Paul Söderlind: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden
Lars E.O. Svensson: Institute of International Economic Studies, Postal: Stockholm University, 106 91 Stockholm, Sweden

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. 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 interewst rates, so as to extract expected future time-paths. Very recently, methods have been designed to extract not only the means but the whole (risk neutral) probability distribution from a set of option prices.

Keywords: Interest rates; exchange rates; inflation; options; forward rate curve; risk neutral distribution

JEL-codes: E43; E52; G13

47 pages, December 1996

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