September 2016 issue contents
Options-implied probability density functions for real interest rates

by Jonathan H. Wright
Johns Hopkins University


This paper constructs options-implied probability density functions for real interest rates. These use options on TIPS, which were launched in 2009. Data availability limits us to studying short-maturity probability density functions for intermediate- to long-term TIPS yields. The PDFs imply high uncertainty about real rates. I also estimate empirical pricing kernels using these option prices along with time-series models fitted to real interest rates. The empirical pricing kernel implies that investors have high marginal utility in states of the world with high real rates.

JEL Codes: C58, E43, G12.

Full article (PDF, 21 pages, 619 kb) 
Discussion by Eric T. Swanson