Currency Crisis Prediction Using ADR Market Data - An Options-Based Approach

28 Pages Posted: 8 Mar 2008

See all articles by Stefan Eichler

Stefan Eichler

Leibniz Universit├Ąt Hannover; Halle Institute for Economic Research

Dominik Maltritz

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: March 4, 2008

Abstract

During capital control episodes, large price deviations between American Depositary Receipts (ADR) and their underlying stocks signal that a currency crisis is about to occur. We interpret this price spread as the price of a call option. Using option pricing theory we derive detailed information about both the probability of a currency crisis and the expected magnitude of devaluation. Analyzing daily ADR market data preceding the Venezuelan crisis (1996), our approach predicts crisis probabilities of almost 100% and forecasts the exchange rate after floating quite accurately. During the Argentine crisis (2002), estimated exchange rates are similar to actual ones.

Keywords: Currency Crisis Prediction, ADR, Stock markets, Options approach

JEL Classification: F 34, F35, G15

Suggested Citation

Eichler, Stefan and Maltritz, Dominik, Currency Crisis Prediction Using ADR Market Data - An Options-Based Approach (March 4, 2008). EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1102502 or http://dx.doi.org/10.2139/ssrn.1102502

Stefan Eichler

Leibniz Universit├Ąt Hannover

Institute of Money and International Finance
Koenigsworther Platz 1
Hannover, 30167
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Dominik Maltritz (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

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