Estimating Market-Implied Rate Hikes from Meeting-Date OIS Swaps
Summary
The note describes using meeting-date overnight index swaps to infer market expectations for central bank rate decisions. The proposed comparison is between the current effective overnight rate and the OIS rate spanning the period around a policy meeting. Their difference can be interpreted as the portion of the swap pricing attributable to expected policy moves, while accounting for the fact that the effective rate and target rate may not track each other as closely as they once did.
An example illustrates the calculation: a meeting-period OIS fixing four basis points above the prevailing fixing is treated as pricing four basis points of tightening after the meeting. A common probability estimate divides that implied move by a standard 25-basis-point increment. This depends on the assumption that a hike occurs in such increments. The note offers a methodology reference, but says some other references are not public; it does not detail curve construction, risk premia, or uncertainty in the inference.
Key ideas
- Meeting-date OIS swaps are used to gauge rate expectations around central bank meetings.
- The effective rate and meeting-period OIS rate are compared to infer the market-priced move.
- The interpretation must allow for differences between the effective rate and the central bank target rate.
- A common hike-probability estimate divides the implied move by a presumed 25-basis-point hike size.
- The calculation relies on assumptions about hike increments and does not fully address risk premia or other pricing effects.
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Full text
# How does the market derive market implied rates hike via swaps? # How does the market derive market implied rates hike via swaps? It is the story of interest at the moment. Rate hike expectations from central banks around the globe. Various sale side research parties publish often market implied rates hike. The magnitude and the probability. I know the basic model via futures where you condition on different events, e.g. a hike or no hike and simply speaking comparing futures before and after a central bank meeting. However, depending on the futures these estimates are not very precise due to iliquidity (e.g. fed fund futures). So research often uses swaps to come with these market implied rate hikes / probability. I was wondering - Which swaps are used for this purpose? - What is the exact methodology behind it. Are there any references? - For the probability one needs a model. What are some good references how this is usually done? Curious to hear any insight on that topic. ## Answer by user42108 (score 3, accepted) https://quant.stackexchange.com/a/68971 Which swaps are used for this purpose? - meeting date OIS. You can get runs from dealers and vendors will have some data. What is the exact methodology behind it. Are there any references? - look at the effective rate, look at the meeting date OIS rate, observe the difference and make an inference about how much of the difference is due to rate expectations (given that effective and target rates no longer line-up the way they did pre-GFC). EDIT: re references, try 'methodology' at this link https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html# for one example. Other references I know of are not publicly available. ## Answer by VexedIntern (score 1) https://quant.stackexchange.com/a/69099 In reply to the followup question on 3rd Dec, heres an example... Lets say the central banks meeting days are the following... 1st Feb 22 1st Mar 22 and currently the market data is as follows AUD-OIS Fix : 4bp AUD-OIS Swap starting on 1st Feb22 to 1st Mar 22 (meeting date OIS): 8bp this implies that the market is pricing in 4bp points of hikes following the 1st Feb meeting. Typically, the "probability" of a hike is calculated by taking this 4bp that is priced in the market and dividing it by 25bp (Inherent assumption here is that central banks hike in clips of 25bp)
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