Changes in Expectation About Monetary Policy Decisions for Short-term Interest Rates

Through financial derivatives we can extract valuable information when we are analyzing the investor’s expectations and their reactions to already experienced shocks, as well as the potential ones in the financial markets. To achieve this analysis, it’s needed to estimate the risk-neutral probability density function (DNR) implied in option prices. The present study examines the reactions and expectations about monetary policy decisions of the short-term interest rates for the Euro and US dollar, during the COVID-19 pandemic and after that. During the pandemic, the major central banks such as the ECB and the FED played an important role in the economy, and to mitigate the effect of this crisis, they lowered the interest rates and inflation began to rise, standing today at high levels. This process put pressure on the stock market as well as the real estate market, given that those are down, high-yield bonds are deflating, and the economy is on a path leading to recession. As long as the major central banks continue to raise interest rates, the markets go lower and lower.