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Description: |
We look at whether monetary decisions constitute a significant macro-finance risk for interest rate options and related implied volatilities. We devise an option-pricing model based on the dynamics of the Federal Reserve’s target rate via a regime-shift approach modeled as discrete Markov chain capturing the timing of Federal Open Market Committee meetings. We find that the regime-shift risk is significantly priced and that the downward and stable regimes of the target rate, associated with a decline in real activity, display higher probabilities of occurrence under the risk-neutral measure. We also observe that implied volatilities display a counter-cyclical behavior.
This is joint work with Geneviève Gauthier and Simon Lalancette (HEC, Montréal). It has just been published online in the Journal of Future Markets.
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| Start Date: |
2015-05-20 |
| Start Time: |
15:00 |
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Speaker: |
René Ferland (Université du Québec à Montréal, Canada)
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Institution: |
Université du Québec à Montréal
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Place: |
Room 2.4
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See more:
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