Risk Premia at the Lower Bound

Anna Helmke and Patrick Shultz, Finance, The Wharton School

Abstract: The goal of our project is to establish a measure of the physical probabilities and risk premia associated with low (zero) interest rate outcomes. Specifically, we will use Eurodollar options to calculate this measure for Libor rates. Such an indicator would add to the existing literature which evaluates the effectiveness of monetary policy during the global financial crisis. Additionally, it could inform monetary policy decisions going forward, in particular as a benchmark for central bankers to better assess the effectiveness of their forward guidance (communication) strategies.