Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-25T07:50:17.787Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  20 August 2018

Michael Hanke ,
Rolf Poulsen  and
Alex Weissensteiner
Get access Rights & Permissions [Opens in a new window]

Abstract

Betting quotes provide valuable information on market-implied probabilities for outcomes of events such as 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 6 , December 2018 , pp. 2663 - 2683
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We thank Jennifer Conrad (the editor) and Stephen Figlewski (the referee) for their helpful comments, and we thank Johannes Sivén, who provided part of the data and commented on earlier versions of the article. Poulsen was partially supported by the research center HIPERFIT funded by contract number 10-092299 from the Danish Strategic Research Council.

References

Black, F.“The Pricing of Commodity Contracts.” Journal of Financial Economics, 3 (1976), 169–179.Google Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637–659.Google Scholar
Breeden, D. T., and Litzenberger, R.. “Prices of State-Contingent Claims Implicit in Option Prices.” Journal of Business, 51 (1978), 621–651.Google Scholar
Castrén, O.“Estimating and Analyzing Currency Options Implied Risk-Neutral Density Functions for the Largest New EU Member States.” European Central Bank Working Paper Series 440 (2005).Google Scholar
Christoffersen, P., and Jacobs, K.. “The Importance of the Loss Function in Option Valuation.” Journal of Financial Economics, 72 (2004), 291–318.Google Scholar
Clark, I. J. Foreign Exchange Option Pricing: A Practitioner’s Guide. West Sussex, UK: Wiley (2010).Google Scholar
Erikson, R., and Wlezien, C.. “Markets vs. Polls as Election Predictors: An Historical Assessment.” Electoral Studies, 31 (2012), 532–539.Google Scholar
Figlewski, S.“Estimating the Implied Risk Neutral Density for the U.S. Market Portfolio.” In Volatility and Time Series Econometrics: Essays in Honor of Robert F. Engle, Bollerslev, T., Russel, J., and Watson, M., eds. Oxford, UK: Oxford University Press (2010).Google Scholar
Garman, M., and Kohlhagen, S.. “Foreign Currency Option Values.” Journal of International Money and Finance, 2 (1983), 231–237.Google Scholar
Hanke, M.; Poulsen, R.; and Weissensteiner, A.. “Where Would the EUR/CHF Exchange Rate Be without the SNB’s Minimum Exchange Rate Policy?” Journal of Futures Markets, 35 (2015), 1103–1116.Google Scholar
Hanke, M.; Poulsen, R.; and Weissensteiner, A.. “Analyzing the Swiss National Bank’s Euro Exchange Rate Policy: A Latent Likelihood Approach.” Quantitative Finance, forthcoming (2018).Google Scholar
Hertrich, M., and Zimmermann, H.. “On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective.” Journal of Money, Credit and Banking, 49 (2017), 567–578.Google Scholar
James, J.; Fullwood, J.; and Billington, P.. FX Option Performance. West Sussex, UK: Wiley (2015).Google Scholar
Jermann, U.“Financial Markets’ Views about the Euro/Swiss Franc Floor.” Journal of Money, Credit and Banking, 49 (2017), 553–565.Google Scholar
Jurek, J., and Xu, Z.. “Option-Implied Currency Risk Premia.” Working Paper, University of Pennsylvania and NBER (2014).Google Scholar
Leahy, M., and Thomas, C.. “The Sovereignty Option: The Quebec Referendum and Market Views on the Canadian Dollar.” Board of Governors of the Federal Reserve System, International Finance Discussion Papers No. 555 (1996).Google Scholar
Malz, A.“Using Option Prices to Estimate Realignment Probabilities in the European Monetary System: The Case of Sterling-Mark.” Journal of International Money and Finance, 15 (1996), 717–748.Google Scholar
Mirkov, N.; Pozdeev, I.; and Söderlind, P.. “Toward Removal of the Swiss Franc Cap: Market Expectations and Verbal Interventions.” Swiss National Bank Working Papers 2016–10 (2016).Google Scholar
Reiswich, D., and Wystup, U.. “A Guide to FX Options Quoting Conventions.” Journal of Derivatives, 18 (2010), 58–68.Google Scholar
Ritchey, R. J.“Call Option Valuation for Discrete Normal Mixtures.” Journal of Financial Research, 13 (1990), 285–296.Google Scholar