Research output: Contribution to journal › Article › peer-review

**Extracting information from asset prices : the methodology of EMU calculators.** / Favero, Carlo; Giavazzi, Francesco; Iacone, Fabrizio; Tabellini, Guido.

Research output: Contribution to journal › Article › peer-review

Favero, C, Giavazzi, F, Iacone, F & Tabellini, G 2000, 'Extracting information from asset prices: the methodology of EMU calculators', *European Economic Review*, vol. 44, pp. 1607-1632. https://doi.org/10.1016/S0014-2921(99)00023-9

Favero, C., Giavazzi, F., Iacone, F., & Tabellini, G. (2000). Extracting information from asset prices: the methodology of EMU calculators. *European Economic Review*, *44*, 1607-1632. https://doi.org/10.1016/S0014-2921(99)00023-9

Favero C, Giavazzi F, Iacone F, Tabellini G. Extracting information from asset prices: the methodology of EMU calculators. European Economic Review. 2000;44:1607-1632. https://doi.org/10.1016/S0014-2921(99)00023-9

@article{4f2d7bf0b28846ae85ac31cbd07b9f4c,

title = "Extracting information from asset prices: the methodology of EMU calculators",

abstract = "This paper develops a particular technique for extracting market expectations from asset prices. We use the term structure of interest rates to estimate the probability the market attaches to the event that a country, Italy, joins the European Monetary Union at a given date. The case of Italy is interesting because in the survey regularly conducted by Reuters, the probability that Italy joins EMU in 1999 has fluctuated, in the first months of 1997, between 0.07 and 0.15, while, during the same period, the measures computed by financial houses - which are based on the term structure of interest rates - ranged between 0.5 and 0.8. The paper proposes a new method for computing these probabilities, and shows that the discrepancies between survey and market-based measures are not the result of market inefficiencies, but depend on an incorrect use of the term structure to compute probabilities. The technique proposed in the paper can also be used to distinguish between convergence of probabilities and convergence of fundamentals, that is to find out whether an observed reduction in interest rate spreads signals a higher probability of joining EMU at a given date, or simply reflects improved fundamentals. It could also be applied, more generally, to extract from assets prices, information on imminent changes in an exchange rate regime. ",

keywords = "Term structure of interest rates; Expectational model; Probabilities of entering EMU",

author = "Carlo Favero and Francesco Giavazzi and Fabrizio Iacone and Guido Tabellini",

year = "2000",

doi = "http://dx.doi.org/10.1016/S0014-2921(99)00023-9",

language = "English",

volume = "44",

pages = "1607--1632",

journal = "European Economic Review",

}

TY - JOUR

T1 - Extracting information from asset prices

T2 - the methodology of EMU calculators

AU - Favero, Carlo

AU - Giavazzi, Francesco

AU - Iacone, Fabrizio

AU - Tabellini, Guido

PY - 2000

Y1 - 2000

N2 - This paper develops a particular technique for extracting market expectations from asset prices. We use the term structure of interest rates to estimate the probability the market attaches to the event that a country, Italy, joins the European Monetary Union at a given date. The case of Italy is interesting because in the survey regularly conducted by Reuters, the probability that Italy joins EMU in 1999 has fluctuated, in the first months of 1997, between 0.07 and 0.15, while, during the same period, the measures computed by financial houses - which are based on the term structure of interest rates - ranged between 0.5 and 0.8. The paper proposes a new method for computing these probabilities, and shows that the discrepancies between survey and market-based measures are not the result of market inefficiencies, but depend on an incorrect use of the term structure to compute probabilities. The technique proposed in the paper can also be used to distinguish between convergence of probabilities and convergence of fundamentals, that is to find out whether an observed reduction in interest rate spreads signals a higher probability of joining EMU at a given date, or simply reflects improved fundamentals. It could also be applied, more generally, to extract from assets prices, information on imminent changes in an exchange rate regime.

AB - This paper develops a particular technique for extracting market expectations from asset prices. We use the term structure of interest rates to estimate the probability the market attaches to the event that a country, Italy, joins the European Monetary Union at a given date. The case of Italy is interesting because in the survey regularly conducted by Reuters, the probability that Italy joins EMU in 1999 has fluctuated, in the first months of 1997, between 0.07 and 0.15, while, during the same period, the measures computed by financial houses - which are based on the term structure of interest rates - ranged between 0.5 and 0.8. The paper proposes a new method for computing these probabilities, and shows that the discrepancies between survey and market-based measures are not the result of market inefficiencies, but depend on an incorrect use of the term structure to compute probabilities. The technique proposed in the paper can also be used to distinguish between convergence of probabilities and convergence of fundamentals, that is to find out whether an observed reduction in interest rate spreads signals a higher probability of joining EMU at a given date, or simply reflects improved fundamentals. It could also be applied, more generally, to extract from assets prices, information on imminent changes in an exchange rate regime.

KW - Term structure of interest rates; Expectational model; Probabilities of entering EMU

U2 - http://dx.doi.org/10.1016/S0014-2921(99)00023-9

DO - http://dx.doi.org/10.1016/S0014-2921(99)00023-9

M3 - Article

VL - 44

SP - 1607

EP - 1632

JO - European Economic Review

JF - European Economic Review

ER -