Martin Mandler – Market Expectations & Option Prices
This book surveys and summarizes the numerous approaches used to extract information on market expectations from option prices. The various approaches are thoroughly explained and many practical issues are discussed, including data selection, data preparation, and presentation and interpretation of results. This enables the reader to implement these techniques in his own applied work easily.
Most studies concerning uncertainty in financial markets focus on substantial uncertainty as represented by historical volatility measures, variances, etc. In contrast, using option prices allows us to study uncertainty in expectations, i.e. to take a forward-looking perspective. In some applications, we study how ECB-council meetings affect uncertainty in money market expectations. Most interesting among our results is a number of event studies that compare how uncertainty in market participants’ expectations reacts to anticipated and unanticipated results of ECB-council meetings.