The economics of options-implied inflation probability density functions |
| |
Authors: | Yuriy Kitsul Jonathan H Wright |
| |
Institution: | 1. Division of Monetary Affairs, Federal Reserve Board, Washington, DC 20551, United States;2. Department of Economics, Johns Hopkins University, Baltimore, MD 21218, United States |
| |
Abstract: | Recently a market in options based on consumer price index inflation (inflation caps and floors) has emerged in the US. This paper uses quotes on these derivatives to construct probability densities for inflation. We study how these probability density functions respond to news announcements and find that the implied odds of deflation are sensitive to certain macroeconomic news releases. We also estimate empirical pricing kernels using these option prices along with time series models fitted to inflation. The options-implied densities assign considerably more mass to extreme inflation outcomes (either deflation or high inflation) than do their time series counterparts. This yields a U-shaped empirical pricing kernel, with investors having high marginal utility in states of the world characterized by either deflation or high inflation. |
| |
Keywords: | C22 E31 E44 G12 |
本文献已被 ScienceDirect 等数据库收录! |
|