Extracting Market Expectations from Option Prices: Case Studies in Japanese Option Markets
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.