Recently, I came across this article, which offers a simple model for estimating the probabilities of interest rate cut/hike from a central bank. This is done by using market data, especially normal market rates and forward rates. Unfortunately, this paper's two most important equations (3.2 and 3.3) have confusing and inconsistent notation and I have not managed to replicate the example in it. My goal is to do something like the Fed's market probability tracker. Unfortunately, the papers the Fed provided are way too complicated for my purposes.

My question is - are there any papers out there estimating this? Preferably the model should be as simple as possible. Any scripts (R/Python/Matlab) that do this would also be appreciated.

Thanks for help!

  • $\begingroup$ I cannot recall seeing papers in this genre before. Attempting to pin down the overall probability distribution of the short rate without using option prices is not an arbitrage-free methodology, so it would not be looked at by practitioners. $\endgroup$ Apr 15, 2020 at 12:42


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.