Options-implied probability density functions for real interest rates

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.

Authors

• Jonathan H. Wright

JEL codes

• C58
• E43
• G12