Geography, skills or both: What explains Fed watchers’ forecast accuracy of US monetary policy?

The paper shows that there is a substantial degree of heterogeneity in the ability of Fed watchers to forecast US monetary policy decisions. Based on a novel database for 268 individual professional forecasters since 1999, the average absolute forecast error of FOMC decisions varies 5–10 basis points between the best and worst-performers across the sample. This heterogeneity is found to be related to both the skills of analysts – such as their educational and employment backgrounds – and to geography. In particular, forecasters located in regions which experience more idiosyncratic economic conditions perform worse in anticipating monetary policy. This evidence is indicative that limited attention and heterogeneous priors are present even for anticipating important events such as monetary policy decisions.     

American option valuation: Implied calibration of GARCH pricing models

This study analyzes the issue of American option valuation when the underlying exhibits a GARCH‐type volatility process. We propose the usage of Rubinstein's Edgeworth binomial tree (EBT) in contrast to simulation‐based methods being considered in previous studies. The EBT‐based valuation approach makes an implied calibration of the pricing model feasible. By empirically analyzing the pricing performance of American index and equity options, we illustrate the superiority of the proposed approach. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark