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

54 Pages Posted: 3 Dec 2016 Last revised: 30 Jun 2017

Michael Hanke

University of Liechtenstein

Rolf Poulsen

University of Copenhagen - Department of Statistics and Operations Research

Alex Weissensteiner

Free University of Bolzano/Bozen

Date Written: June 28, 2017

Abstract

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.

Keywords: exchange rates, forecasting, risk-neutral densities, betting quotes

JEL Classification: F31, F37

Suggested Citation

Hanke, Michael and Poulsen, Rolf and Weissensteiner, Alex, Event-Related Exchange Rate Forecasts Combining Information from Betting Quotes and Option Prices (June 28, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2879466

Michael Hanke (Contact Author)

University of Liechtenstein ( email )

Fuerst Franz Josef-Strasse
Vaduz, FL-9490
Liechtenstein

Rolf Poulsen

University of Copenhagen - Department of Statistics and Operations Research ( email )

Universitetsparken 5
DK-2100
Denmark
+45 (353) 20685 (Phone)

Alex Weissensteiner

Free University of Bolzano/Bozen ( email )

Universitätsplatz 1
Bolzano/Bozen, 39100
Italy
+39 0471 013496 (Phone)

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