The Sensitivity of Interest Rate Options to Monetary Policy Decisions: A Regime-Shift Pricing Approach

摘要

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. (c) 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:66-87, 2016