Reading Interest Rate and Bond Futures Options' Smiles: How PIBOR and National Operators Appreciated the 1997 French Snap Election

The aim of this paper is to compare various methods which extract a Risk Neutral Density (RND) out of PIBOR as well as of Notional interest rate futures options and to investigate how traders react to a political event. We first focus on 5 dates surrounding the 1997 snap election and several methods: Black (1976), a mixture of lognormals (as in Melik and Thomas (1997)), and Hermite expansion (as in Abken, Madan, and Ramamurtie (1996)), and a method based on Maximum Entropy (following Buchen and Kelly (1996)).