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Federal Reserve Bank of Chicago
Working Paper Series
Extracting market expectations from option prices: case studies in Japanese option markets
Hisashi Nakamura
Shigenori Shiratsuka

This paper focuses on the recently developing financial derivatives markets, and examines the usefulness of option prices as an information variable for monetary policy implementation. A set of option prices provides us with information on the whole probability distribution of the future values of underlying assets. Such information enables us to examine the development of market expectations. The paper estimates a time series of implied probability distributions from daily option prices on stock prices and long term government bond futures. The estimation is done for a sample of daily closing prices for the following three periods: (I) the period of a collapsing bubble in the stock market in 1989-90; (ii) the period of serious stock market slump in 1992-94; and (iii) the period of increasing anxiety in the market about a possible deflationary spiral in 1995.

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Hisashi Nakamura & Shigenori Shiratsuka, Extracting market expectations from option prices: case studies in Japanese option markets, Federal Reserve Bank of Chicago, Working Paper Series WP-99-1, 1999.
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Keywords: Monetary policy ; Options (Finance) ; Derivative securities ; Prices ; Japan
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