PrefBlog

The BoC has released a paper by Bo Young Chang and Bruno Feunou titled Measuring Uncertainty in Monetary Policy Using Implied Volatility and Realized Volatility:

We measure uncertainty surrounding the central bank’s future policy rates using implied volatility computed from interest rate option prices and realized volatility computed from intraday prices of interest rate futures. Both volatility measures show that uncertainty decreased following the most important policy actions taken by the Bank of Canada as a response to the financial crisis of 2007–08, such as the conditional commitment of 2009–10, the unscheduled cut in the target rate coordinated with other major central banks, and the introduction of term purchase and resale agreements. We also find that, on average, uncertainty decreases following the Bank of Canada’s policy rate announcements. Furthermore, our measures of policy rate uncertainty improve the estimation of policy rate expectations from overnight index swap (OIS) rates by predicting the risk premium in the OIS market.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 1bp, FixedResets down 5bp and DeemedRetractibles gaining 9bp. Volatility was high, but without obvious patterns. Volume was high.

This entry was posted on Saturday, October 26th, 2013 at 1:42 am and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.