Using option prices to estimate realignment probabilities in the European Monetary System: the case of sterling-mark

Malz, Allan M.

doi:10.1016/0261-5606(96)00032-0

Cited by 111 publications

(84 citation statements)

References 35 publications

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“…This unusual measure was taken to counteract and/or delay a further strengthening of the Swiss franc, whose apparent overvaluation was considered to be harmful to the Swiss economy. From the very beginning, it was clear that this measure would be temporary, but similar to the situation analyzed by Malz (1996), the date of the revocation of this policy was not known to the market. A number of papers (Hanke, Poulsen, and Weissensteiner (2015), Hanke, Poulsen, and Weissensteiner (2016), Hertrich andZimmermann (2017), Jermann (2017), Mirkov, Pozdeev, and Söderlind (2016)) analyze various aspects of the EURCHF exchange rate development during this period.…”

Section: Relation To the Literature: Event Effects In Exchange Ratmentioning

confidence: 99%

“…A well-known paper in this area is Malz (1996), who models the development of the GBPDEM exchange rate in the years 1990-1992. In 1990, the British pound became part 4 of the so-called Exchange Rate Mechanism.…”

Section: Relation To the Literature: Event Effects In Exchange Ratmentioning

confidence: 99%

“…Using only one source of information leads to the estimation problems described above, making it difficult to separate the influence of different parameters (see, e.g., Malz (1996), pp. 732 ff.).…”

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confidence: 99%

“…A number of papers in this area use information from option prices to estimate models for the development of exchange rates around major events. In what follows, we relate the main contributions of our paper to this strand of literature.A well-known paper in this area is Malz (1996), who models the development of the GBPDEM exchange rate in the years 1990-1992. In 1990, the British pound became part 4 of the so-called Exchange Rate Mechanism.…”

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confidence: 99%

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Event-Related Exchange Rate Forecasts Combining Information from Betting Quotes and Option Prices

2017

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Betting quotes provide valuable information on market-implied probabilities for outcomes of events like elections or referendums, which may have an impact on exchange rates. We generate exchange rate forecasts around such events based on a model that combines risk-neutral event probabilities implied from betting quotes with risk-neutral exchange rate densities extracted from currency option prices. Its application to predict exchange rates around the Brexit referendum and the U.S. presidential elections shows that these forecasts -conditional on the respective outcomes -were accurate, and markets were able to separate their views on the likelihood and the impact of these events. * Hanke (corresponding author), Michael.Hanke@uni.li, University of Liechtenstein, Institute for Finance, 9490 Vaduz, Liechtenstein; Poulsen, rolf@math.ku.dk, University of Copenhagen, Department of Mathematical Sciences, 2100 Copenhagen, Denmark; Weissensteiner, Alex.Weissensteiner@unibz.it, Free University of Bozen-Bolzano, School of Economics and Management, 39100 Bozen, Italy. We thank Jennifer Conrad (the editor) and an anonymous referee for their helpful comments, and we thank Johannes Sivén, who provided part of the data and commented on earlier versions of the paper. Poulsen was partially supported by the research center HIPERFIT funded by contract number 10-092299 from the Danish Strategic Research Council. 1 I IntroductionIn a referendum held on June 23, 2016, 51.9% of the voting population of the United Kingdom voted in favor of leaving the European Union (EU), or Brexit 1 for short. The net economic effects on the United Kingdom caused by this result were predominantly viewed as negative, which explains the weakening of the pound against major world currencies observed in the days and weeks after the referendum. industry, 3 and he would have a wall built along the U.S.-Mexican border. Although observers questioned the credibility of this claim, 4 which was quickly downplayed to "just a fence, not a wall" after the election, 5 remarks like these led many observers to view a 1 Strictly speaking, Brexit is the act or the process of invoking Article 50 in the Lisbon Treaty. When referring specifically to the outcome of the referendum, we will use the terms Leave and Remain.2 See, e.g., articles in the Economist, Feb. 27, 2016, http://tinyurl.com/zs4o84v for a view several months before the referendum, and in The Independent, Aug. 23, 2016, http://tinyurl.com/jyrbwq7for an assessment two months afterwards. Both the Brexit referendum and the U.S. presidential elections are examples of important events with likely consequences on exchange rates. In situations like these, conditional exchange rate forecasts depending on the outcome of the event would be interesting for investors, internationally active companies, central banks, and other financial market participants. In this paper, we present a novel approach to derive such forecasts, which combines data from financial markets with data from betting markets. As a second cont...

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Section: Relation To the Literature: Event Effects In Exchange Ratmentioning

confidence: 99%

Section: Relation To the Literature: Event Effects In Exchange Ratmentioning

confidence: 99%

mentioning

confidence: 99%

mentioning

confidence: 99%

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Event-Related Exchange Rate Forecasts Combining Information from Betting Quotes and Option Prices

2017

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“…Many numerical methods can be used to convert a set of option prices into a univariate risk-neutral density (RND) and these are routinely applied to dollar exchange rates (Campa, Chang, & Reider, 1998;Jondeau & Rockinger, 2000;Malz, 1996Malz, , 1997. A manager, a trader, or a central banker concerned about the euro/pound cross rate may find, however, that these univariate methods are infeasible.…”

Section: Introductionmentioning

confidence: 99%

Option prices and risk‐neutral densities for currency cross rates

Taylor

Wang

2009

Journal of Futures Markets

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We thank the referee for the helpful advice. This research has benefited from numerous conversations with Söhnke Bartram, and the assistance of Aris Bikos with data collection is gratefully acknowledged. We are indebted to the seminar participants at the OPTION PRICES AND RISK-NEUTRAL DENSITIES FOR CURRENCY CROSS RATES STEPHEN J. TAYLOR YAW-HUEI WANG*The theoretical relationship between the risk-neutral density (RND) of the euro/ pound cross rate and the bivariate RND of the dollar/euro and the dollar/pound rates is derived; the required bivariate RND is defined by the dollar-rate marginal RNDs and a copula function. The cross-rate RND can be used by banks, international businesses, and central bankers to assess market expectations, to measure risks, and to value options, without relying on over-the-counter markets, which may be either non-existent or illiquid. Empirical comparisons are made between cross-rate RNDs estimated from several data sets. Five one-parameter copula functions are evaluated and it is found that the Gaussian copula is the only oneparameter copula function that is ranked highly in all of the comparisons we have made.

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Density forecasting: a survey

2000

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A density forecast of the realization of a random variable at some future time is an estimate of the probability distribution of the possible future values of that variable. This article presents a selective survey of applications of density forecasting in macroeconomics and finance, and discusses some issues concerning the production, presentation, and evaluation of density forecasts. Copyright © 2000 John Wiley & Sons, Ltd.

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Using option prices to estimate realignment probabilities in the European Monetary System: the case of sterling-mark

Cited by 111 publications

References 35 publications

Event-Related Exchange Rate Forecasts Combining Information from Betting Quotes and Option Prices

Event-Related Exchange Rate Forecasts Combining Information from Betting Quotes and Option Prices

Option prices and risk‐neutral densities for currency cross rates

Density forecasting: a survey

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